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Exam 10: Relevant Costing for Managerial Decisions

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Question 61

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Good management accounting indicates that projects be evaluated using relevant data.In choosing among alternatives, what factors (considerations)are relevant?

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Relevant data includes both quantitative...

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Question 62

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An opportunity cost:

A) Is an unavoidable cost.
B) Requires a current outlay of cash.
C) Results from past managerial decisions.
D) Is the lost benefit of choosing an alternative course of action.
E) Is irrelevant in decision making.

F) A) and B)
G) A) and C)

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Question 63

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An additional cost that is incurred only if a particular action is taken is a(n) :

A company has already incurred an $81,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 43.20 & \$ 81.10 & \$ 29.74 \\\hline \text { B } & \$ 51.16 & \$ 85.73 & \$ 36.61 \\\hline \text { C } & \$ 70.50 & \$ 97.22 & \$ 23.32 \\\hline\end{array}$

Walters Industries manufactures a product that contains part XYZ.The company has always purchased this part from a supplier for $70 each.Walters recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the part instead of buying it.The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 60% of direct labor cost: $\begin{array}{ll}\text { Direct materials } &\$ 52.00 \\\text {Direct labor } &16.00 \\\text { Overhead (fixed and variable) } &\underline{9.60} \\\text { Total } &\underline{\$ 77.60}\end{array}$ The required volume of output to produce the parts will not require any incremental fixed overhead.Incremental variable overhead cost is $4.50 per part.Should Walters make or buy the parts?

Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

A company has already incurred a $12,000 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 700 & \$ 775 & \$ 65 \\\hline \text { B } & \mathbf { 8 0 0 } & \mathbf { 8 8 8 } & \mathbf { 8 9 } \\\hline\end{array}$

A markup percentage equals total costs divided by desired profit.

Teague Plumbing has received a special one-time order for 1,500 toilets (units) at $75 per unit. Teague currently produces and sells 7,500 units at $100 each. This level represents 75% of its capacity. Production costs for these units are $75 per unit, which includes $70 variable cost and $5 fixed cost. To produce the special order, shipping costs of $10,000 will be incurred. Management expects no other changes in costs as a result of the additional production. -Should the company accept the special order? A.No, because additional production would exceed capacity. B.No, because incremental costs exceed incremental revenue. C.Yes, because incremental revenue exceeds incremental costs. D.Yes, because incremental costs exceed incremental revenues. E.No, because the incremental revenue is too low.

The potential benefit of one alternative that is lost by choosing another is known as a(n) :

The net advantage (incremental income)of processing Special Export further into Prime and Feline Surprise would be: A.$98,000 B.$96,000 C.$8,000 D.$6,000 E.$2,000

Rocko Inc.has a machine with a book value of $50,000 and a five-year remaining life.A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine.The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life.Should the machine be replaced?

A sunk cost will change with a future course of action.

What is the overall decision rule management should apply when considering a segment for elimination?

A company expects to produce and sell 20,000 units of a single product.Management desires a 22% return on assets of $3,000,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 105 \\ \text { Nonproduction costs } &\$9 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 350,000 \\ \text { Nonproduction } &\$ 120,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

A company expects to produce and sell 7,000 units of a single product.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 20 \\ \text { Nonproduction costs } &\$ 3 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 175,000 \\ \text { Nonproduction } &\$ 14,000\end{array}$ Compute this company's total cost per unit.

Assume markup percentage equals desired profit divided by total costs.What is the correct calculation to determine the dollar amount of the markup per unit?

Teeco Systems Inc.has a limited amount of direct material available for products 1A1 and 2B2.Each unit of 1A1 has a contribution margin of $12 and each unit of 2B2 has a contribution margin of $30.A unit of 2B2 uses three times as much direct material as a unit of 1A1.What is Teeco's most profitable sales mix, assuming there is unlimited demand for either product?

Derby Inc.manufactures a product which contains a small part.The company has always purchased this motor from a supplier for $125 each.Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it.The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array} { l r } \text { Direct materials } & \$ 38 \\\text { Direct labor } & 50 \\\text { Overhead (fixed and } & \underline { 75} \\\text { variable) } & \\\text { Total } & \underline { \$ 163}\end{array}$ The required volume of output to produce the motors will not require any incremental fixed overhead.Incremental variable overhead cost is $21 per motor.What is the effect on income if Derby decides to make the motors?

A company has already incurred a $55,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 72 & \$ 108 & \mathbf { \$ 5 } \\\hline \text { B } & 83 & 124 & 42 \\\hline \text { C } & 94 & 141 & 45 \\\hline\end{array}$