Exam 11: Relevant Costs for Decision Making

Qualitative analysis aims to identify how the organisation's debt ratio will change as a consequence of the decision to be made.

Joint costs are common to all of the joint products.

Pretiosa Ltd. has two departments, Painting and Polishing. They produce 2 products. Product A needs 6 hours in painting and 6 hours in polishing. Product B needs 2 hours in painting and 4 hours in polishing. Painting has 24 hours available and polishing 18 hours. Total variable costs are $ 20 and $15 for A and B respectively. A sells for $25 and B for $18. The constraints for Pretiosa's 2 departments are:

The split-off point is:

When by-product value is recognised at the time of sale, the value may be recorded as sales revenue, other income, or as a reduction in cost of sales.

Qualitative factors can be disregarded for decisions relating to relaxing constraints.

Uncertainties about future revenues and costs affect non-routine operating decisions.

Which of the following joint cost allocation methods should be used for decision making?

When there are no capacity constraints managers should always emphasise products with the highest contribution margin per unit.

If idle capacity exists, special orders replace regular business.

The physical output method of joint product cost allocation:

For manufacturers, make or buy decisions are often known as:

Pretiosa Ltd. has two departments, Painting and Polishing. They produce 2 products. Product A needs 6 hours in painting and 6 hours in polishing. Product B needs 2 hours in painting and 4 hours in polishing. Painting has 24 hours available and polishing 18 hours. Total variable costs are $ 20 and $15 for A and B respectively. A sells for $25 and B for $18. The objective function to maximise Pretiosa's profits is:

Rapid growth may require a company to outsource certain products or services.

Types of qualitative analysis include CVP and regression.

Joint costs cannot be traced to individual products.

Jasper Joints has 1,000 obsolete joints on hand. These units were produced a year ago at a cost of $10,000. The units could be scrapped for $1,000 or reworked for $2,000 and sold for $5,000. Which alternative is desirable and why?

Information timeliness refers to:

Products should be dropped when its total contribution margin does not cover avoidable fixed costs.

The general rule for relaxing a short term constraint for direct materials is that managers would be willing to pay what they are already paying as well as some or all of the contribution margin per unit of the constrained resource.