Question 1

The split-off point is that stage in the manufacturing process where the products being manufactured can finally be identified as separate products.

Accepted Answer

The split-off point is the point in the production process where distinct products can be identified and measured separately.

Question 2

The term given to the practice of having a process undertaken by an external firm rather than a company doing it itself, is outsourcing.

Accepted Answer

Outsourcing refers to the act of delegating specific business activities to an external service provider. This allows the company to focus on its core competencies while the external firm handles the outsourced task.

Question 3

Effect of alternative costing systems on decisions
Traditional volume-based product costing systems and activity-based costing systems have been presented as alternative methods to use to determine product costs.
i. In a traditional volume-based costing system, costs are classified as fixed and variable. In an activity-based costing system, costs are classified into four categories. List those four categories.
ii. Is it possible for the quantitative analysis to differ depending on whether data is developed from a traditional volume-based costing system or an activity-based costing system? If so, explain which of the four categories of cost in question (i) are likely to cause the difference.

Accepted Answer

The answer of Effect of alternative costing systems on decisions
Traditional...

Question 4

Sunk costs, unitising costs, how costs are allocated, and leaving out opportunity costs are all factors where errors are often made, and will ultimately affect the outcome of the decision.

Accepted Answer

Sunk costs, unitising costs, how costs are allocated, and leaving out opportunity costs are all common areas where errors can occur in decision-making. These errors can lead to incorrect assessments of the costs and benefits of a particular decision, ultimately affecting the outcome.

Question 5

When making decisions, the quantitative information considered consists of factors relevant to the decision that cannot be expressed effectively in numerical terms.

Accepted Answer

Quantitative information refers to data that can be expressed in numerical terms and is used for analysis in decision-making, whereas qualitative information consists of factors that cannot be effectively expressed in numerical terms.

Question 6

When making the decision of whether to process further a joint product, it is generally better to allocate the joint costs using the relative sales value method to ensure the correct decision is made.

Accepted Answer

The decision to process a joint product further beyond the split-off point should not be based on the allocation of joint costs because these costs are sunk costs and do not change with the decision. The decision should be based on whether the incremental revenue from processing further exceeds the incremental costs of processing.

Question 7

Pitfalls in using unit fixed costs
Fixed costs can be expressed as total fixed costs or can be divided by the expected level of activity to obtain fixed costs per unit. Which of these is likely to be more useful in decision making? Explain.

Accepted Answer

The answer of Pitfalls in using unit fixed costs
Fixed costs...

Question 8

Efficient decision-making tends to consider relevant information only and this information focuses on incremental revenue and expenses.

Accepted Answer

Efficient decision-making should consider only relevant information, which includes incremental revenue and expenses. This means that decision-makers should assess the potential increase in revenue and decrease in expenses associated with a particular decision, and weigh these against the costs of implementing the decision. By focusing on the most relevant information, decision-makers can make more informed and effective choices that will benefit their organization in the long run.

Question 9

When a business has idle capacity and has two options to choose from that will maximise capacity, the potential benefit that is surrendered by choosing only one option is known as the opportunity cost.

Accepted Answer

Opportunity cost refers to the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. In this context, when a business has to choose between two options to maximize capacity and selects only one, the benefits it could have gained from the other option represent the opportunity cost.

Question 10

Many decisions can be classified as tactical decisions or strategic decisions. Using an example to illustrate both types of decisions, briefly describe the differences between a tactical and strategic decision.

Accepted Answer

The answer of Many decisions can be classified as tactical...

Question 11

When performance incentives are part of a manager's remuneration, it is unlikely to influence their decision making.

Accepted Answer

Performance incentives can create a conflict of interest for a manager, potentially leading them to make decisions that prioritize their own financial gain over what is best for the company. This can result in unethical behavior and decisions that are not in line with the company's goals and values. Therefore, performance incentives can influence a manager's decision making.

Question 12

The very nature of tactical decisions means that in many situations most overhead costs are considered fixed and may not be relevant to the decision in hand.

Accepted Answer

Tactical decisions are short-term decisions made to achieve specific goals or objectives. These decisions often focus on how to effectively allocate resources to achieve these objectives. Overhead costs, such as rent, salaries, and utilities, are considered fixed costs that will not change regardless of the outcome of the decision. Therefore, these costs are not relevant to the tactical decision in hand.

Question 13

While there is a decision-making model, in many instances managers frequently make decisions without necessarily following the set steps detailed in the model.

Accepted Answer

Managers may use their experience, intuition, or judgment to make decisions that don't necessarily follow a set model.

Question 14

When deciding whether to accept a special order, spare or idle capacity is not a factor that needs to be taken into account.

Accepted Answer

Spare or idle capacity is a crucial factor that needs to be considered when deciding whether to accept a special order, as it represents potential revenue that could offset the cost of accepting the order. If there is enough spare or idle capacity to fulfill the order without incurring additional costs, accepting the order may be profitable.

Question 15

When a department or a product is showing a loss after all costs have been traced and allocated, a company has no option but to make the decision to either close the department or drop the product.

Accepted Answer

The decision to close a department or drop a product involves considering not just the direct costs but also the contribution margin, potential for future growth, strategic importance, and how fixed costs allocated to the department or product would be absorbed by other parts of the business.

Question 16

An activity-based approach to cost analysis is similar to a job costing approach.

Accepted Answer

Activity-based costing (ABC) allocates overhead and indirect costs to specific activities related to production, while job costing assigns costs to individual jobs or batches, focusing on direct costs. ABC is more detailed in allocating indirect costs compared to the broader allocation in job costing.

Quiz 19: Information for Decisions: Relevant Costs and Benefits