Question 1

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost concept includes all manufacturing costs such as labor, materials, and overhead in the cost amount to which the markup is added to determine product price.

Question 2

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Accepted Answer

Discontinuing a segment or product that is contributing to fixed expenses may actually increase overall losses. It is important to consider the impact on the company's cost structure and profitability before making the decision to discontinue a segment or product.

Question 3

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process.

Accepted Answer

The theory of constraints is indeed a manufacturing strategy that aims to identify and reduce the impact of bottlenecks on a process to increase efficiency and productivity.

Question 4

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.

Accepted Answer

In the variable cost concept, only variable costs are included in the product cost, so the markup must cover fixed costs and provide profit.

Question 5

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance.

Accepted Answer

Estimated costs used in the cost-plus approach should not be based on ideal levels of performance, but rather on realistic costs expected to be incurred in production and delivery. Idealized estimates may result in overpricing the product and deterring potential customers.

Question 6

In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Accepted Answer

The cost-plus approach to product pricing involves adding a markup to the product's cost to cover selling expenses, administrative expenses, and profit. Therefore, in using the product cost concept of applying this approach, these expenses are covered in the markup.

Question 7

A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach.

Accepted Answer

The cost-plus approach involves adding a markup to the cost of producing a product or service in order to determine its selling price. This is a common method used by managers when setting prices for the long-term.

Question 8

When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour.

Accepted Answer

This is a correct statement. When a bottleneck occurs, the company should focus on producing the product that generates the highest profit per unit. In this case, it would mean producing the product with the highest contribution margin per bottleneck hour.

Question 9

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Accepted Answer

A bottleneck occurs when the production capacity or capability of a company is not able to keep up with the demand for its product, leading to delays and a potential decrease in revenue.

Question 10

Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing.

Accepted Answer

This statement is true as companies may choose to further process only a portion of their product if it is more cost-effective or efficient to do so, while leaving the rest in its original form.

Question 11

When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

Accepted Answer

Discontinuing a segment should not be the first solution to losses. Other options such as restructuring or improving the segment's operations could be explored before considering discontinuation. Discontinuing a segment could also result in lost opportunities for future profits or lead to negative impacts on the company's overall operations.

Question 12

Activity-based costing provides more accurate and useful cost data than traditional systems.

Accepted Answer

Activity-based costing (ABC) allocates indirect costs to specific activities rather than using a general overhead rate. This results in a more accurate understanding of the true cost of each product or service. Traditional costing methods often apply a single overhead rate to all products or services, which can lead to distortions in cost data. Therefore, ABC is considered to provide more accurate and useful cost data than traditional systems.

Question 13

The lowest contribution margin per scarce resource is the most profitable.

Accepted Answer

The statement is false. The highest contribution margin per scarce resource is the most profitable. This is because the scarce resource is the limiting factor and by maximizing the contribution margin from that particular resource, the overall profitability of the business can be increased.

Question 14

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup.

Accepted Answer

In the variable cost concept of cost-plus pricing, only variable costs are considered in setting the price, and the markup is added to cover fixed costs and desired profit, not including fixed manufacturing costs and fixed selling and administrative expenses in the cost base.

Question 15

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance.

Accepted Answer

When using the cost-plus approach to product pricing, the estimated costs should be based on normal levels of performance, rather than on exceptional or abnormal levels. This will help ensure that the pricing is fair and reasonable, taking into account the expected costs of producing the product at a typical level of efficiency and productivity.

Question 16

The product cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost concept includes all manufacturing costs (direct materials, direct labor, and manufacturing overhead) but does not include selling and administrative expenses; these are considered period costs and are not included in the calculation of the product cost.

Question 17

Make-or-buy decisions should be made only with related parties.

Accepted Answer

Make-or-buy decisions should not only be made with related parties, as this would limit potential opportunities for outsourcing or partnering with new suppliers or contractors. The decision should be based on objective criteria such as cost, risk, and expertise, regardless of the relationship with the potential supplier or contractor.

Question 18

Activity-based costing is determined by charging products for only the services 
(activities) they used during production.

Accepted Answer

Activity-based costing is a cost allocation methodology that assigns costs to the various activities involved in producing a product or service, and then charges products only for the activities they used during production. This allows for a more accurate allocation of costs and helps managers to identify areas for cost reduction or process improvement.

Question 19

A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour.

Accepted Answer

In this scenario, the maximum output of the machinery is 1,000 units per hour, which means that it is the limiting factor or the bottleneck in the production process. Even if there is a demand for 1,200 units per hour, the machinery can only produce a maximum of 1,000 units per hour, creating a bottleneck in the production process.

Question 20

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Accepted Answer

Cost-plus methods do determine the normal selling price by estimating a cost amount per unit and adding a markup.

Quiz 24: Differential Analysis, Product Pricing, and Activity-Based Costing