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N12401 MAD II

Self-Assessment Questions
Relevant Costing

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These exercises are meant to confirm your understanding of the topic concerned. You are expected
to have gone through the class materials and directed readings thoroughly before attempting these
exercises. As you work through these questions, you may find new terminologies/ideas popping out
occasionally, dont get worried at all, as these are deliberate to trigger further exploration of the
issues concerned. So be adventurous and have fun!
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1. The cost of a computer system installed last year is an example of:
a.
a sunk cost
b.
a relevant cost
c.
a differential cost
d.
an avoidable cost
2. Costs
a.
b.
c.
d.

that cannot be changed by any decision made now or in the future are:
fixed costs
indirect costs
avoidable costs
sunk costs

3. For decision making, a listing of the relevant costs:


a.
will help the decision maker concentrate on the pertinent data
b.
will only include future costs
c.
will only include costs that differ among the decision alternatives
d.
should include all of the above
4. Which
a.
b.
c.
d.

of the following costs are NEVER relevant in the decision-making process?


fixed costs
historical costs
relevant costs
variable costs

5. When deciding to purchase a new cutting machine or continue using the old machine, the
following costs are all relevant EXCEPT the:
a.
$50,000 cost of the old machine
b.
$20,000 cost of the new machine
c.
$10,000 disposal value of the old machine
d.
$3,000 annual savings in operating costs if the new machine is purchased
6. Relevant costs of a make-or-buy decision for a part include all of the following EXCEPT:
a.
fixed salaries that will not be incurred if the part is outsourced
b.
current direct material costs of the part
c.
special machinery for the part that has no resale value
d.
material-handling costs that can be eliminated if the part is outsourced
7. Which
a.
b.
c.
d.

of the following would NOT be considered in a make-or-buy decision?


fixed costs that will no longer be incurred
variable costs of production
potential rental income from space occupied by the production area
unchanged supervisory costs

8. When deciding to accept a one-time-only special order from a wholesaler, management should do
all of the following EXCEPT:
a.
analyze product costs
b.
consider the impact of the special order on future prices of their products
c.
determine whether excess capacity is available
d.
verify past design costs for the product

N12401 MAD II

Self-Assessment Questions
Relevant Costing

9. When there is excess capacity, it makes sense to accept a one-time-only special order for less
than the current selling price when:
a.
incremental revenues exceed incremental costs
b.
additional fixed costs must be incurred to accommodate the order
c.
the company placing the order is in the same market segment as your current customers
d.
None of the above is correct.
10. When
a.
b.
c.
d.

deciding whether to discontinue a segment of a business, managers should focus on:


equipment used by the segment that could become idle
reallocation of corporate costs
how total costs differ among alternatives
operating income per unit of the discontinued segment

11. Carolyn has three divisions and the information for the year ended December 2008 is as follows:
Division C
Division R
Division L
Total
000
000
000
000
Sales
350
420
150
920
Variable costs
280
210
120
610
Contribution
70
210
30
310
Fixed overheads
General#
40
48
17
105
Specific
52.5
52.5
52.5
157.5
Net Profit
-22.5
109.5
-39.5
47.5
#
The general fixed overheads are allocated to each division on the basis of sales revenue.
Using the relevant costing approach, which division(s) should remain in operation if Carol Ltd
wishes to maximise profits?
a. Division R only.
b. Division C and R only.
c. Division R and L only.
d. Division C and L only.
12. The printing department of a university is considering whether to print brochure to promote a
charity function. The brochure requires 250 reams of a special type of paper. The department
currently holds 100 reams in inventory of which it bought at 15 per ream last year. These will
have a resale value of 10 per ream. The current market price of the paper is 26 per ream.
What is the relevant cost of the paper that the department should consider if it decides to print
the brochures?
a.
4,400.
b.
4,900.
c.
3,900.
d.
5,400.
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 13 THROUGH 15.
Fair Engineering Company manufactures part QE767 used in several of its engine models. Monthly
production costs for 10,000 units are as follows:
Direct materials
Direct labor
Variable support costs
Fixed support costs
Total costs

$ 80,000
20,000
50,000
40,000
$190,000

It is estimated that 20% of the fixed support costs assigned to part QE767 will no longer be incurred
if the company purchases the part from the outside supplier. Fair Engineering Company has the
option of purchasing the part from an outside supplier at $16 per unit.
2

N12401 MAD II

Self-Assessment Questions
Relevant Costing

13. If Fair Engineering Company accepts the offer from the outside supplier, the monthly avoidable
costs (costs that will no longer be incurred) total:
a.
$ 32,000
b.
$ 82,000
c.
$ 158,000
d.
$190,000
14. If Fair Engineering Company purchases 10,000 QE767 parts from the outside supplier per month,
then its monthly operating income will:
a.
decrease by $2,000
b.
increase by $30,000
c.
decrease by $16,000
d.
decrease by $58,000
15. The maximum price that Fair Engineering Company should be willing to pay the outside supplier
for each unit of part QE767 is:
a.
$10
b.
$15
c.
$15.80
d.
$16
16. CafNott Plc produces a special range of brewed coffee for the Asian market. The coffee is sold in
small packs for $12 each. The first stage in the production process is carried out in the Blending
Department which removes foreign objects from the raw materials and mixes them in the proper
proportions in large containers. The company uses the weighted-average method in its process
costing system. Details for the Blending Department for November 2008 are as below:
Work-in-process on 1 Nov was 30,000 units (90% materials, 80% conversion cost added last
month). 200,000 units were started into the production. 190,000 units were transferred to the
next department. Work-in-process on 30 Nov was 40,000 units (75% materials, 60% conversion
cost added this month).
Costs incurred for the WIP as at 1 Nov were $67,800 for materials and $30,200 for conversion.
Cost added during Nov were $579,000 for materials and $248,000 for conversion
Cost accounted for as follows:
Transferred to the next department
Work-in-process, 30 Nov
Total cost

$805,600
$119,400
$925,000

Required:
(a) What is the cost per equivalent unit for material and for conversion for the month?
(b) A recent market survey shows that customers are willing to buy the product at $6.50 per
unit. Assuming the fixed production costs amount to about 20% of the total cost per unit
calculated in part (a), and assuming the company policy requires a minimum estimated
contribution to sales (C/S) ratio of 40% for its products. Should CafNott Plc continue with
the product?
(c) Once a company adopts the activity-based costing approach to treat the production costs,
these costs would be relevant for the decision-making process. Discuss.

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