Question 1

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

A) True 
 B)False

Question 2

A firm produces three items from a single process in batches containing 40 units A (a by-product); 100 units B; 100 units C. Separable costs and selling prices are:

Joint process costs are $30 000 per batch.
What is the amount of joint costs that would be allocated to B using the net realisable value method and treats by-product revenue as a reduction of the cost of the principal products?

Accepted Answer

A)  $7000 
B)  $7500 
C)  $15 000 
D)  $14 000

Question 3

A joint product with very little value relative to other joint products is termed a:

Accepted Answer

A)  negligible product. 
B)  accounted loss. 
C)  by-product. 
D)  scrap.

Question 4

Sound Systems reported the following results from the sale of 24 000 radios:

Sound Systems expects similar operating results during the current year. Rhythm Systems has offered to purchase 3000 radios at $16 each. Sound Systems estimates approximately 5000 additional units could be made with the capacity currently available in the factory. The owner of Sound Systems is in favour of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is against acceptance because his 'full cost' of production is $17.
Determine the change in profit if the special order is accepted.

Accepted Answer

A)  $3000 increase 
B)  $12 000 increase 
C)  $12 000 decrease 
D)  $36 000 decrease

Question 5

An appropriate way to account for by-products is to:

Accepted Answer

A)  subtract the net realisable value of the by-products from the cost of the joint process. 
B)  deduct the by-product's sales value at split-off from the production cost of the main products. 
C)  allocate a portion of the joint cost to the by-product. 
D)  subtract the net realisable value of the by-products from the cost of the joint process AND/OR deduct the by-product's sales value at split-off from the production cost of the main products.

Question 6

Lido Products produces two products (A and B) from a joint process. The joint cost of production is $80 000. Five thousand units of Product A can be sold at split-off for $20 per unit or processed further at an additional cost of $20 000 and sold for $25 per unit. Ten thousand units of Product B can be sold at split-off for $15 per unit or processed further at an additional cost of $20 000 and sold for $16 per unit.
What is the difference in profit if Lido decides to process further Product A, instead of selling it at split-off?

Accepted Answer

A)  $25 000 increase 
B)  $5000 increase 
C)  $21 000 increase 
D)  $27 000 decrease

Question 7

One method of treating by-products is to:

Accepted Answer

A)  treat the by-product in the same way as the main products. 
B)  allocate all joint costs to both products and by-products. 
C)  adjust the cost of the joint products by subtracting the net realisable value of the by-product from the joint costs. 
D)  adjust the cost of the joint products by subtracting the cost of the by-product from the joint costs.

Question 8

In decision making, opportunity costs are:

Accepted Answer

A)  unimportant costs. 
B)  historical costs. 
C)  relevant costs. 
D)  future costs.

Question 9

Which of the following is least likely to be classified as a tactical decision?

Accepted Answer

A)  Buying a new factory. 
B)  Outsourcing factory security. 
C)  Discontinuing an unprofitable product model. 
D)  Selling or disposing of a by-product

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Xebex Pty Ltd is considering whether to make or buy a component used in the production of Faz Machines. The annual cost of producing the 100 000 components used by the company is as follows. 
If Xebex were to discontinue production of the component, direct fixed manufacturing costs would be reduced by 80 per cent.
What are the irrelevant costs in the decision?

Accepted Answer

A)  $50 000 
B)  $70 000 
C)  $80 000 
D)  $100 000

Question 12

Which of the following would be a relevant cost that would need to be considered for pricing a special order?

Accepted Answer

A)  Additional set-up costs for the special order 
B)  Existing fixed manufacturing overhead 
C)  Non-manufacturing costs that will not change even if the special order is accepted 
D)  All of the costs are relevant costs

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

A) True 
 B)False

Question 15

Sleepo Ltd has been manufacturing only one type of alarm clock, the PlainSnooze model. The company is considering developing some modifications to make another, more advanced model. Two options are available: the ToughSnooze and the MusicSnooze. Both ToughSnooze and MusicSnooze will start with the same processes as the PlainSnooze model, but with additional advanced functions. ToughSnooze has a voice activated snooze function, as well as an 'indestructible' aluminium casing, created for people who throw their alarm clocks around. The MusicSnooze also has a voice activated snooze function, but instead of the tough aluminium casing, it has a 'music choice' function.
In choosing between making the ToughSnooze or the MusicSnooze, which of the following costs are relevant?
I The cost of building the PlainSnooze model.
Ii) The cost of building a voice activated snooze function.
Iii The cost of building an 'indestructible' aluminium cover.
Iv The cost of building the 'music choice' function.

Accepted Answer

A)  i, ii, iii and iii 
B)  ii and iii 
C)  ii, iii and iv 
D)  iii and iv

Question 16

A company produces products A, B and C and the profit and loss statement for the past twelve months shows the following (in thousands) details. 
The company is considering dropping Product C. If it does this, the fixed costs will remain the same except that the firm will be able to rent out excess factory space at $30 000 per annum. If other revenue and cost figures remained the same, what would be the effect on annual profit of dropping Product C?

Accepted Answer

A)  0 
B)  Increase of $30 000 
C)  Increase of $40 000 
D)  Decrease of $10 000

Question 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

A special order generally should be accepted if:

Accepted Answer

A)  its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order. 
B)  excess capacity exists and the revenue exceeds all variable costs associated with the order. 
C)  excess capacity exists and the revenue exceeds allocated fixed costs. 
D)  the revenue exceeds variable costs, regardless of available capacity.

Question 20

The manager of Big Mac Ltd is considering the purchase of equipment to make hamburgers that will reduce annual operating costs by $1500. The equipment will cost $6000 and will have a useful life of five years with no resale value. The new equipment will replace equipment purchased five years ago at a cost of $10 000, that has a book value of $5000 and no resale value. What will be the net effect on profit for the next five years in total if the new equipment is purchased? (Ignore tax effects.)

Accepted Answer

A)  $7500 increase 
B)  $4500 decrease 
C)  $3500 decrease 
D)  $1500 increase

Exam 19: Information for Decisions: Relevant Costs and Benefits

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.

A joint product with very little value relative to other joint products is termed a:

An appropriate way to account for by-products is to:

One method of treating by-products is to:

In decision making, opportunity costs are:

Which of the following is least likely to be classified as a tactical decision?

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

Which of the following would be a relevant cost that would need to be considered for pricing a special order?

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

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.

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

A special order generally should be accepted if: