Deck 7: Cost Management Issues

Question 1

Identify which of the following statements is true. Management accounting:

A) Is used by shareholders to help them manage their investments.
B) Helps managers make decisions and control an organisation.
C) Is used by suppliers to manage their customers.
D) Must comply with accounting standards.
E) None of the above.

Answer 1

B

Question 2

Which of the following represents an overhead if a hotel is trying to determine the cost of hosting a recent conference?

A) Food served to conference delegates
B) Depreciation of the hotel audio visual equipment used at the conference.
C) Paper and pens provided to conference delegates.
D) Wages paid to staff engaged to run the conference desk.
E) None of the above

Answer 2

B

Question 3

Material costs that are not traceable to a cost object represent:

A) An overhead
B) Direct material
C) An opportunity cost
D) A sunk cost
E) None of the above

Answer 3

A

Question 4

An opportunity cost is:

A) The cost arising from pursuing a particular opportunity.
B) When alternative 1 is selected, it is the benefit foregone as a result of not being able to pursue alternative 2.
C) The costs resulting from managers acting opportunistically.
D) The cost savings resulting from buying stock opportunistically.
E) None of the above

Question 5

A sunk cost is:

A) The cost of foundations sunk in the ground.
B) A cost that always varies in line with sales and management cannot change this relationship.
C) A cost relating to an event that has already occurred and cannot be altered.
D) A cost that is recurring.
E) None of the above

Question 6

A direct cost is:

A) A cost that can be observed directly and therefore measured accurately.
B) A cost resulting from the specific directions of a senior manager.
C) A cost that directly relates to sales.
D) A cost that can be traced to a particular cost object.
E) None of the above

Question 7

Which of the following is true?

A) It is generally assumed that variable costs become greater per unit as sales increase.
B) It is generally assumed that variable costs become less per unit as sales decrease.
C) It is generally assumed that total variable costs are unaffected by a reduction in sales.
D) It is generally assumed that variable costs remain approximately the same per unit, regardless of the volume of sales
E) None of the above

Question 8

A semi-variable cost is:

A) A cost that increases by at least half of increases in revenue.
B) Has a sunk and a variable cost component.
C) Has a fixed and a variable cost component.
D) A cost that increases in line with sales sometimes.
E) None of the above

Question 9

In a week when a hotel sells 800 room nights, its cost of cleaning rooms is $23,000. In a week when it sells 500 room nights, its total room cleaning cost is $20,000. Use the high-low method to determine the hotel's fixed cost per week to clean rooms.

A) Weekly fixed cost is $12,000.
B) Weekly fixed cost is $15,000.
C) Weekly fixed cost is $16,000.
D) Weekly fixed cost is $18,000.
E) None of the above

Question 10

A hotel has the following profit and loss statement for its quietest month of the year.
Gala Hotel Ltd
Profit and Loss Statement for February

$\begin{array}{lrr}\text { Revenue } & \$ 100,000 & \\\text { Cost of sales } & 34,000 & \\\text { Gross profit } & & 66,000 \\\text { Less expenses } & & \\\text { Maintenance } & 24,000 & \\\text { Salaries } & 32,000 & \\\text { Electricity } & \underline{55,000} & \underline{111,000} \\\text { Net operating loss } & & \underline{45,000}\end{array}$ The hotel accountant has determined that:
$\bullet$ The hotel pays $8,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$ Salaries are all fixed.
$\bullet$ Variable electricity expense in February was $20,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in February?

A) Reduced profit by $15,000.
B) Reduced profit by $30,000.
C) Reduced profit by $40,000.
D) Increased profit by $45,000.
E) None of the above

Question 11

A Las Vegas hotel is considering disposing of a drinks vending machine as it would like to place a hotel phone in the space occupied by the vending machine. The vending machine has been generating $6,500 in profit for the hotel. When making this decision, the $6,500 annual profit generated by the vending machine can be viewed as:

A) A sunk cost
B) On overhead
C) A variable cost
D) An opportunity cost.
E) None of the above

Question 12

Which of the following statements is true:

A) If revenue doubles, a variable cost could treble.
B) A hotel restaurant fixed costs per meal sold will stay the same across quiet and busy seasons.
C) Semi-variable costs have fixed and variable components.
D) In most business situations, the majority of variable costs are indirect.
E) None of the above

Question 13

Widely-used cost classification schemes include:

A) Direct and indirect costs.
B) Variable and fixed costs.
C) Decision making and control costs.
D) A, B and C
E) A and B

Question 14

Which of the following statements is true:

A) Incremental costs vary in direct proportion to revenue.
B) A semi variable cost item can stay the same over large changes in revenue, but increase once a decision to increase capacity is implemented.
C) An opportunity cost will tend to vary in line with revenue.
D) A direct cost is a cost that can be traced to a particular cost object.
E) None of the above

Question 15

Variable costs are costs that:

A) Increase at decreasing rates as revenue increases.
B) Vary per unit of output as activity changes.
C) Vary in total as activity output levels change.
D) Remain constant per unit of output as activity varies.
E) C and D are both true statements concerning variable costs.

Question 16

Which of the following is not an example of a variable cost?

A) The cost of housekeeping in a large hotel.
B) The cost of beer sold at a bar
C) The cost of spaghetti ingredients sold at an Italian restaurant.
D) The cost of incentive-based commissions paid to sales staff.
E) Straight line depreciation on a kitchen oven that will be replaced after five years.

Question 17

In a month when a hotel's laundry department processes 20,000 kgs of laundry, the laundry operating costs are $15,000. In a month when it processes 25,000 kgs of laundry, the laundry operating costs are $17,500. Use the high-low method to determine the laundry department's fixed cost per month.

A) Monthly fixed cost is $10,000.
B) Monthly fixed cost is $8,000.
C) Monthly fixed cost is $5,000.
D) Monthly fixed cost is $3,000.
E) None of the above

Question 18

A hotel has the following profit and loss statement for its quietest month of the year.
Silky Sheets Hotel Ltd
Profit and Loss Statement for February
$\begin{array}{lrr}\text { Revenue } & \$ 90,000 & \\\text { Cost of sales } & \underline{26,000} & \\\text { Gross profit } & &64,000 \\\text { Less expenses } & & \\\text { Maintenance } & 26,000 & \\\text { Salaries \& wages } & 30,000 & \\\text { Electricity } & \underline{49,000} & \\ && \underline{105,000} \\\text { Net operating loss }&&\underline{\text {\$41,000 }}\end{array}$ The hotel accountant has determined that:
$\bullet$ The hotel pays $6,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$ Half the salaries and wages are fixed.
$\bullet$ Variable electricity expense in February was $24,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in February?

A) Reduced profit by $5,000.
B) Reduced profit by $10,000.
C) Reduced profit by $15,000.
D) Reduced profit by $20,000.
E) None of the above

Question 19

A Las Vegas hotel is considering disposing of a drinks vending machine as it would like to place a hotel phone in the space occupied by the vending machine. The vending machine has three years of $2,500 per annum depreciation charges still to be expensed. When making this decision, the $2,500 annual depreciation charges can be viewed as:

A) A sunk cost
B) An incremental cost
C) A variable cost
D) An opportunity cost
E) None of the above

Question 20

Which of the following is untrue?

A) It is generally assumed that total variable costs increase when sales increase.
B) It is generally assumed that fixed cost per unit remains the same when sales decrease.
C) It is generally assumed that total monthly fixed cost remains the same as the volume of sales changes from the busy to the quiet season in a year.
D) It is generally assumed that variable costs remain approximately the same per unit sold as the volume of sales changes from the busy to the quiet season in a year.
E) Many overheads are fixed costs.

Question 21

Which of the following is untrue?

A) An opportunity cost represents the cost of an opportunity that has been lost.
B) Some costs double when the volume of sales doubles.
C) Semi variable costs have a fixed and a variable cost component.
D) A direct cost is a cost that can be traced to a cost object relatively easily.
E) An incremental cost is a cost that does not change as a result of a decision.

Question 22

Variable costs:

A) Vary in total in proportion to changes in sales.
B) Remain the same per unit as sales levels change.
C) Can also be direct costs.
D) A and B only.
E) A. B. and C.

Question 23

In the last financial year, during its busiest month, the Outback Tours company took 12,000 guests on its tours and incurred total costs of $28,000. During its quietest month it had 8,000 guests and its costs were $20,000. How much are Outback Tours monthly fixed costs?

A) $2,000
B) $4,000
C) $6,000
D) $8,000.
E) None of the above.

Question 24

When trying to decide whether a cost is relevant to a decision to outsource office cleaning services, a manager should view a cost as relevant if:

A) It is a sunk cost.
B) It is a historical cost that is the same regardless whether the outsourcing occurs.
C) It is an anticipated future cost that will arise if the cleaning service is outsourced.
D) It is a historical cost that can be precisely measured.
E) None of the above

Question 25

The Outback Spectacular show has a shop that sells cowboy style jackets. It has spent $33,000 to purchase 3,000 jackets. Due to changing fashions, they have not been able to sell the jackets at the regular selling price of $20.00. The company is evaluating two alternatives. They could drop the selling price of the jackets to $8 each or they could modify the jackets at a cost of $5,000 and sell them for a total of $32,000.
What would be the effect on profit of modifying the jackets as opposed to selling them for $8 each?

A) $3,000 increase.
B) $3,000 decrease.
C) $1,000 increase.
D) $1,000 decrease.
E) $5,000 increase.

Question 26

A hotel has the following profit and loss statement for its quietest month of the year.
Romantic Nights Hotel Ltd
Profit and Loss Statement for March

$\begin{array}{lrr}\text { Revenue } & \$ 80,000 & \\\text { Cost of sales } & \underline{22,000} & \\ \text { Gross profit } & &58,000 \\\text { Less expenses } & & \\\text { Maintenance } & 22,000 & \\\text { Salaries \& wages } & 28,000 & \\\text { Electricity } & \underline{45,000} & \\& & \$ \underline{95,000} \\\text { Net operating loss } & &\underline{\$37,000}\end{array}$ The hotel accountant has determined that:
$\bullet$ The hotel pays $60,000 per year under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$ 75% of the salaries and wages are fixed.
$\bullet$ Variable electricity expense in March was $21,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in March?

A) Reduced profit by $5,000.
B) Reduced profit by $10,000.
C) Reduced profit by $13,000.
D) Reduced profit by $20,000.
E) None of the above

Question 27

A hotel is preparing a cost schedule for a client who is planning to hold a conference in the hotel's main ballroom. Which of the following is not a direct cost in connection with the hotel hosting the conference.

A) Food provided to delegates.
B) Casual employee engaged to act as delegate receptionist during the conference.
C) Depreciation of chairs and tables to be used in the ballroom.
D) Main conference venue set up costs (arranging seating, hanging sponsor banners, etc.).
E) Flower arrangements provided for the conference gala dinner.

Question 28

In a month when a hotel's laundry department processes 10,000 kgs of laundry, the laundry operating costs are $15,000. In a month when it processes 20,000 kgs of laundry, the laundry operating costs are $20,000. Use the high-low method to determine the laundry department's fixed cost per month.

A) Monthly fixed cost is $5,000.
B) Monthly fixed cost is $8,000.
C) Monthly fixed cost is $10,000.
D) Monthly fixed cost is $12,000.
E) None of the above

Question 29

In a month when a hotel's laundry department processes 30,000 kgs of laundry, the laundry operating costs are $17,000. In a month when it processes 20,000 kgs of laundry, the laundry operating costs are $14,000. Use the high-low method to determine the laundry department's fixed cost per month.

A) Monthly fixed cost is $10,000.
B) Monthly fixed cost is $8,000.
C) Monthly fixed cost is $5,000.
D) Monthly fixed cost is $3,000.
E) None of the above

Question 30

In a month when a hotel's laundry department processes 10,000 kgs of laundry, the laundry operating costs are $9,000. In a month when it processes 15,000 kgs of laundry, the laundry operating costs are $11,500. Use the high-low method to determine the laundry department's fixed cost per month.

A) Monthly fixed cost is $7,000.
B) Monthly fixed cost is $6,000.
C) Monthly fixed cost is $5,000.
D) Monthly fixed cost is $4,000.
E) None of the above

Question 31

Which of the following is true?

A) It is generally assumed that variable costs remain approximately the same per unit of output, regardless of the volume of sales.
B) It is generally assumed that variable costs become less per unit as sales decrease.
C) It is generally assumed that total variable costs are unaffected by a reduction in sales.
D) It is generally assumed that variable costs become less per unit as sales increase, but at a diminishing rate.
E) None of the above are true statements

Question 32

Costs that have a fixed and a variable component are termed:

A) Pseudo variable costs
B) Partial variable costs
C) Semi-variable costs
D) Quasi variable costs
E) None of the above

Question 33

Which of the following is not a widely-used cost classification scheme:

A) Direct vs indirect costs.
B) Variable vs fixed costs.
C) Outlay vs opportunity costs.
D) Fixed vs volatile costs.
E) Incremental vs sunk costs.

Question 34

A hotel has the following profit and loss statement for its quietest month of the year.
Gala Hotel Ltd
Profit and Loss Statement for February

$\begin{array}{lrr}\text { Revenue } & \$ 100,000 & \\\text { Cost of sales } & \underline{34,000} & \\\text { Gross profit } & & 66,000\\\text { Less expenses } & & \\\text { Maintenance } & 24,000 & \\\text { Salaries } & 32,000 & \\\text { Electricity } & \underline{55,000} & \\& & \underline{111,000} \\\text { Net operating loss } & & \underline{45,000}\end{array}$ The hotel accountant has determined that:
$\bullet$ The hotel pays $10,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$ 50% of salaries are fixed.
$\bullet$ Variable electricity expense in February was $25,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in February?

A) Reduced profit by $5,000.
B) Reduced profit by $8,000.
C) Reduced profit by $11,000.
D) Reduced profit by $14,000.
E) None of the above

Question 35

When making a short-term pricing decision:

A) Management can be justified in setting a price that covers variable cost but no other costs.
B) Management must ensure all costs are covered.
C) Management can be justified in restricting its thinking to accounting issues and can ignore marketing issues.
D) Management can be justified in focusing on direct costs and making a contribution to overheads.
E) None of the above.

Question 36

An indirect expense:

A) Allocated to individual departments will reduce the overall net profit of the business.
B) When allocated to departments will provide the correct departmental net profit.
C) Should be allocated on the basis of the revenue or square metres of each department.
D) When allocated encourages manager's to set prices covering indirect and direct costs.
E) When allocated does not assist with accountability for that cost.

Question 37

A Las Vegas hotel is considering disposing of a row of vending machines as it would like to place an internet cafe in the space occupied by the vending machines. The vending machines have been generating $18,000 in profit for the hotel. When making this decision, the $18,000 annual profit generated by the vending machines can be viewed as:

A) An incremental cost
B) An opportunity cost
C) A sunk cost
D) An overhead
E) A variable cost

Question 38

In a week when hotel room cleaning costs were $18,000, 600 rooms had been sold. In a week when hotel room cleaning costs were $22,000, 800 rooms had been sold. Use the high-low method to determine the hotel's fixed cost per week to clean rooms.

A) Weekly fixed cost is $6,000.
B) Weekly fixed cost is $4,000.
C) Weekly fixed cost is $8,000.
D) Weekly fixed cost is $12,000.
E) None of the above

Question 39

A scuba diving shop has the following profit and loss statement for its quietest month of the year.
Scuba Dives Ltd
Profit and Loss Statement for February

$\begin{array}{lrr}\text { Revenue } & \$ 70,000 & \\\text { Cost of goods sold } & \underline{28,000} & \\\text { Groff profit } & & 42,000 \\\text { Less expenses } & & \\\text { Maintenance } & 28,000 & \\\text { Salaries \& wages } & 22,000 & \\\text { Rent } & \underline{25,000} & \underline{75,000} \\\text { Net operating loss } & & \underline{33,000}\end{array}$ The shop's accountant has determined that:
$\bullet$ The shop pays $7,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$ 50% of the salaries and wages are fixed.
$\bullet$ Rent is all fixed.
What would have been the impact on the shop's profit for the year if it had closed in February?

A) Reduced profit by $24,000.
B) Reduced profit by $10,000.
C) No change to the profit.
D) Increased profit by $1,000.
E) Reduced profit by $3,000.