Exam 17: Accounting for Decision Making: With and Without Resource Constraints

Ausco Products provides the following information: If the market will only accept a total of 400 units of any of the three products combined, which product(s) should Ausco Products produce?

What are opportunity costs, and when are they relevant costs?

Which of the following can be constraints for manufacturers?

What are avoidable costs, and when are they relevant costs?

What are incremental costs, and when are they relevant costs?

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: Should the frames be purchased instead of being made?

Consider the following information. Which of the following is true? Product X:

The contribution is also known as the internal opportunity cost, and reflects the cost of using the resource within the organisation itself due to competing opportunities.

Sunk costs are costs that have been incurred, or whose payment cannot be avoided; they are irrelevant to future decisions.

A department generates income of $20 000 and has variable costs of $14 000 and avoidable fixed costs of $7500. This indicates that the costs directly attributable to the department exceed its income and the department should be closed.

When making comparisons using relevant cost and benefit analysis with traditional analysis based on actual costs, the result will depend on the particular circumstances of the firm making the decision.

Ausco Products provides the following information: The total labour availability is limited to 1000 hours at these costs. Which products should Ausco Products produce?

Incremental or differential costs are the increases in costs or benefits between alternative opportunities available to an entity.

The Multiproducts Company currently purchases a component for $30 each. The company has excess capacity and is considering the possibility of making the component. The Cost Accounting Department estimates that the following costs would be incurred to make each unit of the component: Additionally, if Multiproducts decides to make the component, additional foremen, custodial personnel, and material handlers are required at a total cost of $150 000 per year.

In a situation where a division has variable costs and avoidable fixed costs, and these costs combined exceed income, then based only on the financials the division should be closed.

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: If the frames were purchased and later sold by Pronto at normal prices, the overall profits would:

A supplier of components for the automotive industry has the opportunity to purchase a job lot of parts which it would normally manufacture. The purchase price is $80 000. The production costs for the same number of units are: Should the parts be purchased and why?

The Transporter Company produces material-handling equipment for use in commercial manufacturing. As part of its operations, Transporter has three distinct product lines: belts, conveyors, and elevators. The company is currently considering the elimination of the belt product line. The belt line's sales average $850 000 annually. Annual variable manufacturing costs and variable selling costs total $320 000 and $140 000, respectively. Annual fixed costs total $450 000, of which $120 000 are considered to be unavoidable.

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The differential benefit of the aeroplane is:

Opportunity costs are economic measures and therefore not relevant to accounting decision making.