MULTIPLE CHOICE QUESTIONS

1. Managerial accountants:
A. rarely become involved in an organization's decision-making activities.
B. make decisions that focus solely on an organization's accounting matters.
C. collect data and rovide information so that decisions can be made.
!. often serve as a cross-functional team member" making a #ide range of decisions.
$. become involved in activities %C% and %!.%
Ans#er: $ &': 1 (ye: )C
*. +actors in a decision roblem that cannot be e,ressed in numerical terms are:
A. -ualitative in nature.
B. -uantitative in nature.
C. redictive in nature.
!. sensitive in nature.
$. uncertain in nature.
Ans#er: A &': * (ye: )C
.. At #hich ste or stes in the decision-making rocess do -ualitative considerations generally
have the greatest imact/
A. 0ecifying the criterion and identifying the alternatives.
B. !eveloing a decision model.
C. Collecting the data.
!. Making a decision.
$. 1dentifying the alternatives.
Ans#er: ! &': * (ye: )C
2. An accounting information system should be designed to rovide information that is useful.
(o be useful the information must be:
A. -ualitative rather than -uantitative.
B. uni-ue and unavailable through other sources.
C. historical in nature and not urort to redict the future.
!. marginal bet#een t#o alternatives.
$. relevant" accurate" and timely.
Ans#er: $ &': * (ye: )C
150 Hilton, Managerial Accounting, Seventh Edition
3. (o be useful in decision making" information should ossess #hich of the follo#ing
characteristics/
)elevance Accuracy (imeliness
A. 4es 5o 4es
B. 4es 4es 5o
C. 4es 4es 4es
!. 5o 4es 4es
$. 5o 5o 4es
Ans#er: C &': * (ye: )C
6. A trade-off in a decision situation sometimes occurs bet#een information:
A. accuracy and relevance.
B. relevance and uni-ueness.
C. accuracy and timeliness.
!. sensitivity and accuracy.
$. sensitivity and relevance.
Ans#er: C &': * (ye: )C
7. 8hich of the follo#ing best defines the concet of a relevant cost/
A. A ast cost that is the same among alternatives.
B. A ast cost that differs among alternatives.
C. A future cost that is the same among alternatives.
!. A future cost that differs among alternatives.
$. A cost that is based on ast e,erience.
Ans#er: ! &': . (ye: )C
9. Consider the follo#ing costs and decision-making situations:
1.(he cost of e,isting inventory" in a kee vs. disosal decision.
11.(he cost of secial electrical #iring" in an e-uiment ac-uisition decision.
111.(he salary of a suervisor #ho #ill be transferred else#here in the organization" in a
deartment-closure decision.
8hich of the above costs is :are; relevant to the decision situation noted/
A. 1 only.
B. 11 only.
C. 111 only.
!. 1 and 11.
$. 11 and 111.
Ans#er: B &': . (ye: 5
151 Hilton, Managerial Accounting, Seventh Edition
<. (he follo#ing costs are relevant to the decision situation cited e,cet:
A. the cost of hiring a full-time staff attorney" in a decision to establish an in-house legal
deartment or retain the services of a rominent la# firm.
B. the remodeling cost of e,isting office sace" in a firm's decision to stay at its current
location or move to a ne# building.
C. the long-term salary costs demanded by =oe (orrez :a suerstar; and )i Moran :an
average layer; in baseball contract negotiations" in a decision that determines the
amounts by #hich ticket rices must be raised.
!. the cost to enhance an airline's 8eb site" in a decision to e,and e,isting service to either
0alt &ake City or >hoeni,.
$. the commissions that could be earned by a saleserson" in a decision that involves
saleserson comensation methods :i.e." commissions or flat monthly salaries;.
Ans#er: ! &': . (ye: 5
1?. 8hich of the follo#ing costs can be ignored #hen making a decision/
A. 'ortunity costs.
B. !ifferential costs.
C. 0unk costs.
!. )elevant costs.
$. All future costs.
Ans#er: C &': 2 (ye: )C
11. (he book value of e-uiment currently o#ned by a firm is an e,amle of a:n;:
A. future cost.
B. differential cost.
C. comarative cost.
!. oortunity cost.
$. sunk cost.
Ans#er: $ &': 2 (ye: )C
1*. (he cost of inventory currently o#ned by a firm is an e,amle of a:n;:
A. oortunity cost.
B. sunk cost.
C. relevant cost.
!. differential cost.
$. future cost.
Ans#er: B &': 2 (ye: )C
Chapter 14 152
1.. (he City of Miami is about to relace an old fire truck #ith a ne# vehicle in an effort to save
maintenance and other oerating costs. 8hich of the follo#ing items" all related to the
transaction" #ould not be considered in the decision/
A. >urchase rice of the ne# vehicle.
B. >urchase rice of the old vehicle.
C. 0avings in oerating costs as a result of the ne# vehicle.
!. >roceeds from disosal of the old vehicle.
$. +uture dereciation on the ne# vehicle.
Ans#er: B &': 2 (ye: 5
12. $legant" 1nc." has @1*3"??? of inventory that suffered minor smoke damage from a fire in the
#arehouse. (he comany can sell the goods %as is% for @23"???A alternatively" the goods can
be cleaned and shied to the firm's outlet center at a cost of @*."???. (here the goods could
be sold for @9?"???. 8hat alternative is more desirable and #hat is the relevant cost for that
alternative/
A. 0ell %as is"% @1*3"???.
B. Clean and shi to outlet center" @*."???.
C. Clean and shi to outlet center" @1?."???.
!. Clean and shi to outlet center" @129"???.
$. 5either alternative is desirable" as both roduce a loss for the firm.
Ans#er: B &': 2 (ye: A" 5
13. 1n early =uly" Mike Bottfried urchased a @7? ticket to the !ecember 13 game of the Chicago
(itans. :(he (itans belong to the Mid#est +ootball &eague and lay their games outdoors on
the shore of &ake Michigan.; >arking for the game #as e,ected to cost aro,imately @**"
and Bottfried #ould robably send another @13 for a souvenir rogram and food. 1t is no#
!ecember 12. (he (itans #ere having a miserable season and the temerature #as e,ected
to eak at 3 degrees on game day. Mike therefore decided to ski the game and took his #ife
to the movies" #ith tickets and dinner costing @3?. (he sunk cost associated #ith this decision
situation is:
A. @*?.
B. @3?.
C. @7?.
!. @1?7.
$. some other amount.
Ans#er: C &': 2 (ye: A
153 Hilton, Managerial Accounting, Seventh Edition
16. 1n early =uly" =im &oez urchased a @7? ticket to the !ecember 13 game of the Chicago
(itans. :(he (itans belong to the Mid#est +ootball &eague and lay their games outdoors on
the shore of &ake Michigan.; >arking for the game #as e,ected to cost aro,imately @**"
and &oez #ould robably send another @13 for a souvenir rogram and food. 1t is no#
!ecember 12. (he (itans #ere having a miserable season and the temerature #as e,ected
to eak at 3 degrees on game day. =im therefore decided to ski the game and took his #ife to
the movies" #ith tickets and dinner costing @3?. (he amount of sunk cost that should
influence =imCs decision to take his #ife to the movies and dinner is:
A. @?.
B. @*?.
C. @3?.
!. @7?.
$. some other amount.
Ans#er: A &': 2 (ye: A" 5
17. An oortunity cost may be described as:
A. a forgone benefit.
B. an historical cost.
C. a secialized tye of variable cost.
!. a secialized tye of fi,ed cost.
$. a secialized tye of semivariable cost.
Ans#er: A &': 2 (ye: )C
19. (he term %oortunity cost% is best defined as:
A. the amount of money aid for an item.
B. the amount of money aid for an item" taking inflation into account.
C. the amount of money aid for an item" taking ossible discounts into account.
!. the benefit associated #ith a reDected alternative #hen making a choice.
$. an irrelevant decision factor.
Ans#er: ! &': 2 (ye: )C
1<. A factory that makes a art has significant idle caacity. (he factory's oortunity cost of
making this art is e-ual to:
A. the variable manufacturing cost er unit.
B. the fi,ed manufacturing cost er unit.
C. the semivariable cost er unit.
!. the total manufacturing cost er unit.
$. zero.
Ans#er: $ &': 2 (ye: 5
Chapter 14 154
*?. 0usan is contemlating a Dob offer #ith an advertising agency #here she #ill make @32"??? in
her first year of emloyment. Alternatively" 0usan can begin to #ork in her father's business
#here she #ill earn an annual salary of @.9"???. 1f 0usan decides to #ork #ith her father" the
oortunity cost #ould be:
A. @?.
B. @.9"???.
C. @32"???.
!. @<*"???.
$. irrelevant in deciding #hich Dob offer to accet.
Ans#er: C &': 2 (ye: A
*1. 8hich of the follo#ing costs should be used #hen choosing bet#een t#o decision
alternatives/
)elevant
Cost
0unk
Cost
'ortunity
Cost
A. 5o 4es 5o
B. 5o 4es 4es
C. 4es 5o 5o
!. 4es 5o 4es
$. 4es 4es 4es
Ans#er: ! &': 2 (ye: )C
**. (riumh" 1nc." is studying #hether to e,and oerations by adding a ne# roduct line.
8hich of the follo#ing choices correctly denotes the costs that should be considered in this
decision/
'ortunity Cost 0unk Cost
A. 4es 4es
B. 4es 0ometimes
C. 4es 5o
!. 5o 4es
$. 5o 5o
Ans#er: C &': 2 (ye: )C
*.. A secial order generally should be acceted if:
A. its revenue e,ceeds allocated fi,ed costs" regardless of the variable costs associated #ith
the order.
B. e,cess caacity e,ists and the revenue e,ceeds all variable costs associated #ith the order.
C. e,cess caacity e,ists and the revenue e,ceeds allocated fi,ed costs.
!. the revenue e,ceeds total costs" regardless of available caacity.
$. the revenue e,ceeds variable costs" regardless of available caacity.
Ans#er: B &': 3 (ye: )C
155 Hilton, Managerial Accounting, Seventh Edition
*2. (#o months ago" Eictory urchased 2"3?? ounds of Fydrol" aying @13".??. (he market for
this roduct has been very strong since the ac-uisition" #ith the market rice Duming to @2.?3
er ound. :Eictory can buy or sell Fydrol at this rice.; (he comany recently received a
secial-order in-uiry" one that #ould re-uire the use of 2"*?? ounds of Fydrol. 8hich of the
follo#ing is :are; relevant in deciding #hether to accet the secial order/
A. (he .??-ound remaining inventory of Fydrol.
B. (he @2.?3 market rice.
C. (he @..2? urchase rice.
!. 2"3?? ounds of Fydrol.
$. More than one of the above factors are relevant.
Ans#er: B &': 3 (ye: A" 5
*3. +lo#er Comany" #hich is oerating at caacity" desires to add a ne# service to its raidly
e,anding business. (he service should be added as long as service revenues e,ceed:
A. variable costs.
B. fi,ed costs.
C. the sum of variable costs and fi,ed costs.
!. the sum of variable costs and any related oortunity costs.
$. the sum of variable costs" fi,ed costs" and any related oortunity costs.
Ans#er: ! &': 3 (ye: 5
*6. Ba,ter has been aroached about roviding a ne# service to its clients. (he comany #ill
bill clients @1*? er hourA the related hourly variable and fi,ed oerating costs #ill be @63 and
@13" resectively. 1f all emloyees are currently #orking at full caacity on other client
matters" the er-hour oortunity cost of being unable to rovide this ne# service is:
A. @?.
B. @2?.
C. @33.
!. @9?.
$. @1*?.
Ans#er: C &': 2" 3 (ye: A
Chapter 14 156
*7. 0nider" 1nc." #hich has e,cess caacity" received a secial order for 2"??? units at a rice of
@13 er unit. Currently" roduction and sales are budgeted for 1?"??? units #ithout
considering the secial order. Budget information for the current year follo#s.
0ales @1<?"???
&ess: Cost of goods sold 123"???
Bross margin @ 23"???
Cost of goods sold includes @.?"??? of fi,ed manufacturing cost. 1f the secial order is
acceted" the comany's income #ill:
A. increase by @*"???.
B. decrease by @*"???.
C. increase by @12"???.
!. decrease by @12"???.
$. change by some other amount.
Ans#er: C &': 3 (ye: A
*9. 0ound" 1nc." reorted the follo#ing results from the sale of *2"??? units of 1(-32:
0ales @3*9"???
Eariable manufacturing costs *99"???
+i,ed manufacturing costs 1*?"???
Eariable selling costs 3*"9??
+i,ed administrative costs .3"*??
)hythm Comany has offered to urchase ."??? 1(-32s at @16 each. 0ound has available
caacity" and the resident is in favor of acceting the order. 0he feels it #ould be rofitable
because no variable selling costs #ill be incurred. (he lant manager is oosed because the
%full cost% of roduction is @17. 8hich of the follo#ing correctly notes the change in income
if the secial order is acceted/
A. @."??? decrease.
B. @."??? increase.
C. @1*"??? decrease.
!. @1*"??? increase.
$. 5one of the above.
Ans#er: ! &': 3 (ye: A
157 Hilton, Managerial Accounting, Seventh Edition
*<. Com(ronics" a manufacturer of comuter eriherals" has e,cess caacity. (he comany's
Gtah lant has the follo#ing er-unit cost structure for item no. 9<:
Eariable manufacturing @2?
+i,ed manufacturing 13
Eariable selling 9
+i,ed selling 11
(raceable fi,ed administrative 2
Allocated administrative *
(he traceable fi,ed administrative cost #as incurred at the Gtah lantA in contrast" the
allocated administrative cost reresents a %fair share% of Com(ronics' cororate overhead.
Gtah has been resented #ith a secial order of 3"??? units of item no. 9< on #hich no selling
cost #ill be incurred. (he roer relevant cost in deciding #hether to accet this secial order
#ould be:
A. @2?.
B. @3<.
C. @61.
!. @9?.
$. some other amount.
Ans#er: A &': 3 (ye: A
.?. (he term %outsourcing% is most closely associated #ith:
A. secial-order decisions.
B. make-or-buy decisions.
C. e-uiment relacement decisions.
!. decisions to rocess Doint roducts beyond the slit-off oint.
$. decisions that involve limited resources.
Ans#er: B &': 3 (ye: )C
.1. (orrey >ines is studying #hether to outsource its Fuman )esources :FH); activities. 0alaried
rofessionals #ho earn @.<?"??? #ould be terminatedA in contrast" administrative assistants
#ho earn @1*?"??? #ould be transferred else#here in the organization. Miscellaneous
deartmental overhead :e.g." sulies" coy charges" overnight delivery; is e,ected to
decrease by @.?"???" and @*3"??? of cororate overhead" reviously allocated to Fuman
)esources" #ould be icked u by other deartments. 1f (orrey >ines can secure needed FH)
services locally for @21?"???" ho# much #ould the comany benefit by outsourcing/
A. @1?"???.
B. @.3"???.
C. @1.?"???.
!. @133"???.
$. 5othing" as it #ould be cheaer to kee the deartment oen.
Ans#er: A &': 3 (ye: A
Chapter 14 15
.*. !onnelly" a division of !akota $nterrises" currently makes 1??"??? units of a roduct that
has created a number of manufacturing roblems. !onnelly's costs follo#.
Manufacturing costs:
Eariable @2*?"???
+i,ed 13?"???
Allocated cororate administrative cost 7?"???
1f !onnelly #ere to discontinue roduction" fi,ed manufacturing costs #ould be reduced by
9?I. (he relevant cost of deciding #hether the division should urchase the roduct from an
outside sulier is:
A. @2*?"???.
B. @2<?"???.
C. @32?"???.
!. @37?"???.
$. @62?"???.
Ans#er: C &': 3 (ye: A
... Maddo," a division of 0tanley $nterrises" currently erforms comuter services for various
deartments of the firm. 'ne of the services has created a number of oerating roblems" and
management is e,loring #hether to outsource the service to a consultant. (raceable variable
and fi,ed oerating costs total @9?"??? and @*3"???" resectively" in addition to @19"??? of
cororate administrative overhead allocated from 0tanley. 1f Maddo, #ere to use the outside
consultant" fi,ed oerating costs #ould be reduced by 7?I. (he irrelevant costs in Maddo,'s
outsourcing decision total:
A. @17"3??.
B. @19"???.
C. @*3"???.
!. @*3"3??.
$. some other amount.
Ans#er: ! &': 3 (ye: A
.2. 8hich of the follo#ing statements regarding costs and decision making is correct/
A. +i,ed costs must be considered only on a er-unit basis.
B. >er-unit fi,ed cost amounts are valid only for make-or-buy decisions.
C. >er-unit fi,ed costs can be misleading because such amounts aear to behave as variable
costs #hen" in actuality" the amounts are related to fi,ed e,enditures.
!. 0unk costs can be misleading in make-or-buy decisions because these amounts aear to
be relevant differential costs.
$. 'ortunity costs should be ignored #hen evaluating decision alternatives.
Ans#er: C &': 3 (ye: )C
15! Hilton, Managerial Accounting, Seventh Edition
.3. An architecture firm currently offers services that aeal to both individuals and commercial
clients. 1f the firm decides to discontinue services to individuals because of ongoing losses"
#hich of the follo#ing costs could the comany likely avoid/
A. Allocated cororate overhead.
B. Building dereciation.
C. 1nsurance.
!. Eariable oerating costs.
$. Monthly installment ayments on general-urose" comuter drafting e-uiment.
Ans#er: ! &': 3 (ye: 5
.6. 'ccidental is contemlating droing a roduct because of ongoing losses. Costs that #ould
be relevant in this situation #ould include variable manufacturing costs as #ell as:
A. factory dereciation.
B. avoidable fi,ed costs.
C. unavoidable fi,ed costs.
!. allocated cororate administrative costs.
$. general cororate advertising.
Ans#er: B &': 3 (ye: )C
.7. Coastal Airlines has a significant resence at the 0an =ose 1nternational Airort and therefore
oerates the $merald Club" #hich is across from gate .6 in terminal 1. (he $merald Club
rovides food and business services :e.g." data orts; for the comany's fre-uent flyers.
Consider the follo#ing selected costs of Club oeration:
1. )ecetionist and suervisory salaries
*. Catering
.. (erminal dereciation :based on s-uare footage;
2. Airort fees :comuted as a ercentage of club revenue;
3. Allocated Coastal administrative overhead
Management is e,loring #hether to close the club and e,and the seating area for gate .6.
8hich of the receding e,enses #ould the airline classify as unavoidable/
A. ..
B. 2.
C. 3.
!. ." 3.
$. (he correct ans#er is not listed.
Ans#er: ! &': 3 (ye: 5
Chapter 14 160
.9. (he 0hoe !eartment at the Baton )ouge !eartment 0tore is being considered for closure.
(he follo#ing information relates to shoe activity:
0ales revenue @.3?"???
Eariable costs:
Cost of goods sold *9?"???
0ales commissions .?"???
+i,ed oerating costs <?"???
1f 7?I of the fi,ed oerating costs are avoidable" should the 0hoe !eartment be closed/
A. 4es" Baton )ouge #ould be better off by @*."???.
B. 4es" Baton )ouge #ould be better off by @3?"???.
C. 5o" Baton )ouge #ould be #orse off by @1."???.
!. 5o" Baton )ouge #ould be #orse off by @2?"???.
$. 5one of the above.
Ans#er: A &': 3 (ye: A
.<. 0omerset Cororation is comosed of five divisions" and each division is allocated a share of
0omerset overhead to make divisional managers a#are of the cost of running the cororate
head-uarters. (he follo#ing information relates to the Metro !ivision:
0ales @7"3??"???
Eariable oerating costs 3"1??"???
(raceable fi,ed oerating costs 1"<??"???
Allocated cororate overhead .??"???
1f the Metro !ivision is closed" 1??I of the traceable fi,ed oerating costs can be eliminated.
8hat #ill be the imact on 0omerset's overall rofitability if the Metro !ivision is closed/
A. !ecrease by @*??"???.
B. !ecrease by @3??"???.
C. !ecrease by @*"1??"???.
!. !ecrease by @*"2??"???.
$. 5one of the above.
Ans#er: B &': 3 (ye: A
2?. 'rtega 1nteriors rovides design services to residential and commercial clients. (he
residential services roduce a contribution margin of @23?"??? and have traceable fi,ed
oerating costs of @29?"???. Management is studying #hether to dro the residential
oeration. 1f closed" the fi,ed oerating costs #ill fall by @.7?"??? and 'rtega's net income
#ill:
A. increase by @.?"???.
B. increase by @9?"???.
C. increase by @.2?"???.
!. decrease by @9?"???.
$. decrease by @.2?"???.
Ans#er: ! &': 3 (ye: A
161 Hilton, Managerial Accounting, Seventh Edition
Gse the follo#ing to ans#er -uestions 21-2*:
Fi(ech manufactures t#o roducts: )egular and 0uer. (he results of oerations for *?,1 follo#.
)egular 0uer (otal
Gnits 1?"??? ."7?? 1."7??
0ales @*2?"??? @72?"??? @<9?"???
&ess: Cost of goods sold 19?"??? 291"??? 661"???
Bross margin @ 6?"??? @*3<"??? @.1<"???
&ess: 0elling e,enses 6?"??? 1.2"??? 1<2"???
'erating income @ ? @1*3"??? @1*3"???
+i,ed manufacturing costs included in cost of goods sold amount to @. er unit for )egular and @*?
er unit for 0uer. Eariable selling e,enses are @2 er unit for )egular and @*? er unit for 0uerA
remaining selling amounts are fi,ed.
21. Fi(ech #ants to dro the )egular roduct line. 1f the line is droed" comany-#ide fi,ed
manufacturing costs #ould fall by 1?I because there is no alternative use of the facilities.
8hat #ould be the imact on oerating income if )egular is discontinued/
A. @?.
B. @1?"2?? increase.
C. @*?"??? increase.
!. @.<"6?? decrease.
$. 5one of the above.
Ans#er: ! &': 3 (ye: A
2*. !isregard the information in the revious -uestion. 1f Fi(ech eliminates )egular and uses the
available caacity to roduce and sell an additional 1"3?? units of 0uer" #hat #ould be the
imact on oerating income/
A. @*9"??? increase
B. @23"??? increase
C. @33"??? increase
!. @93"??? increase
$. 5one of the above.
Ans#er: C &': 3 (ye: A
2.. 8hen deciding #hether to sell a roduct at the slit-off oint or rocess it further" Doint costs
are not usually relevant because:
A. such amounts do not hel to increase sales revenue.
B. such amounts only slightly increase a comany's sales margin.
C. such amounts are sunk and do not change #ith the decision.
!. the sales revenue does not decrease to the e,tent that it should" if comared #ith searable
rocessing.
$. such amounts reflect oortunity costs.
Ans#er: C &': 6 (ye: )C
Chapter 14 162
22. >roduct costs incurred after the slit-off oint in a Doint rocessing environment are termed:
A. searable rocessing costs.
B. Doint roduct costs.
C. non-relevant costs.
!. scra costs.
$. soilage costs.
Ans#er: A &': 6 (ye: )C
23. +oster Comany is considering #hether to sell )eto, at the slit-off oint or subDect it to
further rocessing and roduce a more refined roduct kno#n as )eto,-+. Consider the
follo#ing items:
1.(he selling rice of )eto,-+
11.(he Doint rocessing cost of )eto,.
111.(he searable cost of roducing )eto,-+.
8hich of the above items is :are; relevant to +oster's decision to rocess )eto, into )eto,-+/
A. 1 only.
B. 11 only.
C. 111 only.
!. 1 and 11.
$. 1 and 111.
Ans#er: $ &': 6 (ye: )C
26. &ido manufactures A and B from a Doint rocess :cost J @9?"???;. +ive thousand ounds of A
can be sold at slit-off for @*? er ound or rocessed further at an additional cost of @*?"???
and then sold for @*3. (en thousand ounds of B can be sold at slit-off for @13 er ound or
rocessed further at an additional cost of @*?"??? and later sold for @16. 1f &ido decides to
rocess B beyond the slit-off oint" oerating income #ill:
A. increase by @1?"???.
B. increase by @*?"???.
C. decrease by @1?"???.
!. decrease by @*?"???.
$. decrease by @39"???.
Ans#er: C &': 6 (ye: A
163 Hilton, Managerial Accounting, Seventh Edition
27. 1ndia Cororation has @*??"??? of Doint rocessing costs and is studying #hether to rocess =
and K beyond the slit-off oint. 1nformation about = and K follo#s.
>roduct = >roduct K
(ons roduced *3"??? 13"???
0earable variable rocessing costs beyond slit-off @62"??? @1??"???
0elling rice er ton at slit-off 13 3*
0elling rice er ton after additional rocessing *1 39
1f 1ndia desires to ma,imize total comany income" #hat should the firm do #ith regard to
>roducts = and K/
>roduct = >roduct K
A. 0ell at slit-off 0ell at slit-off
B. 0ell at slit-off >rocess beyond slit-off
C. >rocess beyond slit-off 0ell at slit-off
!. >rocess beyond slit-off >rocess beyond slit-off
$. (here is not enough information to Dudge.
Ans#er: C &': 6 (ye: A
29. A comany that is oerating at full caacity should emhasize those roducts and services that
have the:
A. lo#est total er-unit costs.
B. highest contribution margin er unit.
C. highest contribution margin er unit of scarce resource.
!. highest oerating income.
$. highest sales volume.
Ans#er: C &': 6 (ye: )C
2<. A firm that decides to emhasize those goods #ith the highest contribution margin er unit
may have made an incorrect decision #hen the comany:
A. is highly automated.
B. has e,cess caacity.
C. has caacity constraints in the form of limited resources.
!. has a high fi,ed-cost structure.
$. has a high level of sunk costs.
Ans#er: C &': 6 (ye: 5
Chapter 14 164
3?. 8right $nterrises" #hich roduces various goods" has limited rocessing hours at its
manufacturing lant. (he follo#ing data aly to roduct no. 6?7:
0ales rice er unit: @<.6?
Eariable cost er unit: @6.*?
>rocess time er unit: 2 hours
Management is no# studying #hether to devote the firm's limited hours to roduct no. 6?7 or
to other roducts. 8hat key dollar amount should management focus on #hen determining
no. 6?7's %value% to the firm and deciding the best course of action to follo#/
A. @?.93.
B. @*.2?.
C. @..2?.
!. @6.*?.
$. @<.6?.
Ans#er: A &': 6 (ye: A" 5
31. 0mith Manufacturing has *7"??? labor hours available for roducing L and 4. Consider the
follo#ing information:
>roduct L >roduct 4
)e-uired labor time er unit :hours; * .
Ma,imum demand :units; 6"??? 9"???
Contribution margin er unit @3.?? @6.??
Contribution margin er labor hour @*.3? @*.??
1f 0mith follo#s roer managerial accounting ractices" #hich of the follo#ing roduction
schedules should the comany set/
>roduct L >roduct 4
A. ? units 9"??? units
B. 1"3?? units 9"??? units
C. 6"??? units ? units
!. 6"??? units 3"??? units
$. 6"??? units 9"??? units
Ans#er: ! &': 6 (ye: A
165 Hilton, Managerial Accounting, Seventh Edition
3*. Bush Manufacturing has .1"??? labor hours available for roducing M and 5. Consider the
follo#ing information:
>roduct M >roduct 5
)e-uired labor time er unit :hours; * .
Ma,imum demand :units; 6"3?? 9"???
Contribution margin er unit @3.?? @3.7?
Contribution margin er labor hour @*.3? @1.<?
1f Bush follo#s roer managerial accounting ractices in terms of setting a roduction
schedule" ho# much contribution margin #ould the comany e,ect to generate/
A. @.1"23?.
B. @6."1??.
C. @66"7??.
!. @79"1??.
$. 5one of the above.
Ans#er: C &': 6 (ye: A
Gse the follo#ing to ans#er -uestions 3.-32:
=ohnson Comany makes t#o roducts: Caret Kleen and +loor !eodorizer. 'erating information
from the revious year follo#s.
Caret Kleen +loor !eodorizer
Gnits roduced and sold 3"??? 2"???
Machine hours used 3"??? *"???
0ales rice er unit @7 @1?
Eariable cost er unit @2 @9
+i,ed costs of @*?"??? er year are resently allocated e-ually bet#een both roducts. 1f the roduct
mi, #ere to change" total fi,ed costs #ould remain the same.
3.. (he contribution margin er machine hour for +loor !eodorizer is:
A. @?.*3.
B. @*.??.
C. @2.??.
!. @3.??.
$. @*?.??.
Ans#er: C &': 6 (ye: A
Chapter 14 166
32. Assuming there is unlimited demand for both roducts and =ohnson has 1?"??? machine hours
available" ho# many units of each roduct should be roduced and sold/
Caret Kleen +loor !eodorizer
A. ? units ? units
B. ? units *?"??? units
C. 3"??? units 1?"??? units
!. 9"??? units 2"??? units
$. 1?"??? units ? units
Ans#er: B &': 6 (ye: A" 5
33. A techni-ue that is useful in e,loring #hat #ould haen if a key decision rediction or
assumtion roved #rong is termed:
A. sensitivity analysis.
B. uncertainty analysis.
C. roDect analysis.
!. linear rogramming.
$. the theory of constraints.
Ans#er: A &': 6 (ye: )C
36. 8hich of the follo#ing characteristics #ould best e,lain the use of robabilities and
e,ected values in a decision analysis/
A. &imited resources.
B. Gncertainty.
C. 1nflation.
!. Multile roducts and services.
$. >roduction bottlenecks.
Ans#er: B &': 6 (ye: )C
37. Consider the follo#ing statements about relevant costing and activity-based costing:
1.(he concet of relevant costs and benefits cannot be used in conDunction #ith an activity-
based costing system.
11.(he concet of relevant costs and benefits must be modified for use #ith an activity-based
costing system.
111.Benerally seaking" the decision maker can better associate relevant costs #ith the
activities that drive them under an activity-based costing system than under a
conventional roduct-costing system.
8hich of the above statements is :are; true/
A. 1 only.
B. 11 only.
C. 111 only.
!. 1 and 11.
$. 11 and 111.
Ans#er: C &': 7 (ye: )C
167 Hilton, Managerial Accounting, Seventh Edition
39. &inear rogramming #ould be used by decision makers #hen there are:
A. limited resources for labor.
B. scarce resources for machine hours.
C. scarce resources for both labor and machine hours.
!. multile scarce resources.
$. limited resources for material.
Ans#er: ! &': 9 (ye: )C
3<. A constraint function in a linear-rogramming roblem might focus on:
A. sales dollars.
B. labor hours.
C. variable costs.
!. fi,ed costs.
$. -ualitative factors.
Ans#er: B &': 9 (ye: 5
6?. 8hen using a grahical solution to a linear rogramming roblem" the otimal solution #ill
lie in an area commonly kno#n as the:
A. region of ma,imization.
B. feasible region.
C. obDective region.
!. constraint region.
$. curvilinear region.
Ans#er: B &': 9 (ye: )C
Gse the follo#ing to ans#er -uestions 61-6*:
>rudential Cororation manufactures t#o roducts: L and 4. (he comany has 2"??? hours of
machine time available and can sell no more than 9?? units of roduct L. 'ther ertinent data follo#.
>roduct L >roduct 4
0elling rice @9.?? @1<.??
Eariable cost ..?? 3.??
+i,ed cost ..3? 6.*3
Machine time er unit * hours . hours
61. 8hich of the follo#ing is >rudential's obDective function/
A. Ma,imize M J *L N .4.
B. Ma,imize M J 9L N 1<4.
C. Ma,imize M J 3L N 124.
!. Ma,imize M J 1.3?L N 7.734.
$. Minimize M J 6.3?L N 11.*34.
Ans#er: C &': 9 (ye: A
Chapter 14 16
6*. 8hich of the follo#ing is a constraint function of >rudential/
A. Ma,imize M J 3L N 124.
B. Minimize M J 6.3?L N 11.*34.
C. L 9??.
!. *L 2"???A .4 2"???.
$. *L N .4 2"???.
Ans#er: $ &': 9 (ye: A
EXERCISES
Relevant Decision Factors
6.. (he follo#ing costs relate to a variety of decision settings:
Cost !ecision
1. Allocated cororate overhead Closing a money-losing deartment
*. Cost of an old car Eehicle relacement
.. !irect materials Make or buy a roduct
2. 0alary of marketing manager >roDect discontinuanceA manager to be transferred
else#here in the firm
3. Fome theater installation >urchase of a ne# home
6. Gnavoidable fi,ed overhead >lant closure
7. )esearch e,enditures incurred last
year" related to ne# roduct
>roduct introduction to marketlace
9. @2 million advertising rogram 8hether to romote roduct A or B #ith the @2
million rogram
<. Manufactured cost of e,isting
inventory
8hether to discard the goods or sell them to a
third-#orld country
)e-uired:
Consider each of the nine costs listed and determine #hether it is relevant or irrelevant to the
decision cited. 1f the cost is irrelevant" briefly e,lain #hy.
&': ." 2" 3 (ye: 5
Ans#er:
1. 1rrelevantO(he cost #ill be incurred #hether the deartment continues to oerate or is
closed.
*. 1rrelevantO(he cost is sunk.
.. )elevant
2. 1rrelevantO(he cost #ill be incurred #hether or not the roDect is discontinued.
3. )elevant" although this is a highly otional item.
6. 1rrelevantO(he cost #ill be incurred #hether or not the lant is closed.
7. 1rrelevantO(he cost is sunk.
9. 1rrelevantO(he cost is the same regardless of #hich roduct is selected.
<. 1rrelevantO(he cost is sunk.
16! Hilton, Managerial Accounting, Seventh Edition
Chapter 14 170
Relevant Decision Factors
62. Clancy Ean &ines is considering the ac-uisition of t#o ne# trucks. Because of imroved
mileage" these vehicles are e,ected to have a lo#er oerating cost er mile than the trucks the
comany lans to relace. Management is studying #hether the firm #ould be better-off
keeing the older vehicles or going ahead #ith the relacement" and has identified the
follo#ing decision factors to evaluate:
1. Cost and book value of the old trucks
*. Moving revenues" #hich are not e,ected to change #ith the ac-uisition
.. 'erating costs of the ne# and old vehicles
2. 5e# truck urchase rice and related dereciation charges
3. >roceeds from sale of the old vehicles
6. (he 9I return on alternative investments that Clancy #ill forego by tying u cash in
the ne# trucks
7. !rivers' #ages and fringe benefits
)e-uired:
Classify the seven decision factors listed into the follo#ing categories :note: factors may be
used more than once;:
A. )elevant costs.
B. 'ortunity costs.
C. 0unk costs.
!. +actors to be considered in the decision.
&': ." 2" 3 (ye: 5
Ans#er:
A. ." 2" 6
B. 6
C. 1
!. ." 2" 3" 6
171 Hilton, Managerial Accounting, Seventh Edition
Relevant Costs
63. Attleboro Comany recently discontinued the manufacture of roduct =13. (he standard costs
for this roduct #ere:
!irect material @ 3?
!irect labor *?
Eariable overhead 12
+i,ed overhead .3
(otal @11<
(here are 9?? units of this roduct in finished-goods inventory. (he units are technologically
obsolete" and the follo#ing alternatives are being considered:
1.!isose of as scra. (he roceeds from the sale #ill e-ual the cost of transortation to the
disosal site.
*.0ell to an e,orter for sale in a develoing country. (he sales rice to the e,orter #ould be
@1* er unit.
..)emanufacture the roducts to convert them into model =16" a model that normally sells for
@*??. (he additional cost to convert the =13 units #ould be @23A the standard cost to
manufacture =16 is @1*3. >resently" there is sufficient caacity to manufacture roduct
=16 directly or to do the necessary conversion #ork on =13.
)e-uired:
A. !etermine the current carrying value of the =13 inventory.
B. $valuate each alternative and determine the financial benefit to Attleboro if the alternative
is ursued.
&': 2" 3 (ye: A
Ans#er:
A. $nding inventory: 9?? units , @11< J @<3"*??
B. 1. 0cra: no financial benefit.
*. 0ell to e,orter: 9?? units , @1* J @<"6??
.. Modify =13 Manufacture =16
1ncremental revenue @*?? @*??
&ess: 1ncremental cost 23 1*3
5et benefit @133 @ 73
(he conversion of =13 into =16 #ill yield a @133 benefit" more than roducing =16s
directly. 5ote that the @11< cost of e,isting =13s is sunk.
Chapter 14 172
Relevant Costs
66. Mystic" 1nc." roduces a variety of roducts that carry the logos of teams in 0outhern +ootball
&eague :0+&;. (he comany recently aid the league @93"??? for the rights to market a
oular layer Dersey and immediately began roduction. (he follo#ing information is
available:
5umber of Derseys manufactured: *3"???
Cost of Derseys manufactured: @6*3"???
Amount of manufacturing costs aid to-date: @21?"???
5umber of Derseys sold to-date: ?
$stimated future marketing costs: @..?"???
Anticiated selling rice er Dersey: @2*
(he 0+& is about to file a la#suit to sto Dersey sales and is demanding another @3?"??? from
Mystic for the manufacturing rights. Conversations #ith Mystic's attorneys indicate that the
league has a strong case and is likely to #in the suit. 1f this situation arises" Mystic #ill be
unable to recover any amounts aid to the 0+&.
)e-uired:
Mystic's sales deartment anticiates very strong demand and a sellout of all Derseys
manufactured.
A. !etermine the overall rofitability of the Dersey roduct line if Mystic settles the
disagreement #ith the 0+& and the anticiated sellout occurs.
B. 0hould the comany ay the additional @3?"??? demanded by the league or should the
Dersey rogram be droed/ 0ho# comutations to suort your ans#er.
&': 2" 3 (ye: A

Ans#er:
A. (he Derseys roduce a @2?"??? loss for the comany: 0ales revenues :*3"??? , @2* J
@1"?3?"???; - manufacturing costs :@6*3"???; - rights :@93"??? N @3?"???; - romotion
costs :@..?"???;.
B. Mystic should ay the @3?"??? demanded by the league given that sunk costs in this
situation total @71?"??? :@93"??? N @6*3"???;. :Although only @21?"??? of this latter
amount has been aid to-date" the comany is liable for 1??I of the manufacturing cost
incurred.; (hus" for a @3?"??? ayment" Mystic #ill generate @1"?3?"??? in revenue and
incur currentHfuture costs of @.9?"??? :@..?"??? N @3?"???;" for a net benefit of @67?"???.
(his net benefit #ill contribute to#ard covering the reviously incurred sunk costs of
@71?"???.
173 Hilton, Managerial Accounting, Seventh Edition
Special (Csto!" Or#er
67. Fo#ard )obinson builds custom homes in Cincinnati. )obinson #as aroached not too long
ago by a client about a otential roDect" and he submitted a bid of @29."9??" derived as
follo#s:
&and @ 9?"???
Construction materials 1??"???
0ubcontractor labor costs 1*?"???
@.??"???
Construction overhead: *3I of direct costs 73"???
Allocated cororate overhead .3"???
(otal cost @21?"???
)obinson adds an 19I rofit margin to all Dobs" comuted on the basis of total cost. 1n this
client's case the rofit margin amounted to @7."9?? :@21?"??? , 19I;" roducing a bid rice
of @29."9??. Assume that 7?I of construction overhead is fi,ed.
)e-uired:
A. 0uose that business is resently very slo#" and the client countered #ith an
offer on this home of @.<?"???. 0hould )obinson accet the client's offer/ 8hy/
B. 1f )obinson has more business than he can handle" ho# much should he be
#illing to accet for the home/ 8hy/
&': 2" 3 (ye: A" 5
Ans#er:
A. A relevant cost analysis sho#s that the home is still rofitable at @.<?"???" and the offer
should be acceted. Kee in mind that business is very slo#.
&and @ 9?"???
Construction materials 1??"???
0ubcontractor labor costs 1*?"???
Eariable construction overhead: @73"??? , .?I **"3??
(otal relevant costs @.**"3??
B.0ince demand is very strong" )obinson should hold firm to the @29."9?? rice. (his #ay he
can cover all of his costs and make his normal 19I rofit margin.
Chapter 14 174
Special Or#er$ Otsorcin%
69. Cornell Cororation manufactures faucets. 0everal #eeks ago" the firm received a secial-
order in-uiry from 4ale" 1nc. 4ale desires to market a faucet similar to Cornell's model no. 33
and has offered to urchase ."??? units. (he follo#ing data are available:
Cost data for Cornell's model no. 33 faucet: direct materials" @23A direct labor" @.? :*
hours at @13 er hour;A and manufacturing overhead" @7? :* hours at @.3 er hour;.
(he normal selling rice of model no. 33 is @19?A ho#ever" 4ale has offered Cornell
only @113 because of the large -uantity it is #illing to urchase.
4ale re-uires a design modification that #ill allo# a @2 reduction in direct-material
cost.
Cornell's roduction suervisor notes that the comany #ill incur @9"7?? in additional
set-u costs and #ill have to urchase a @.".?? secial device to manufacture these units.
(he device #ill be discarded once the secial order is comleted.
(otal manufacturing overhead costs are alied to roduction at the rate of @.3 er
labor hour. (his figure is based" in art" on budgeted yearly fi,ed overhead of @6*2"???
and lanned roduction activity of *2"??? labor hours.
Cornell #ill allocate @3"??? of e,isting fi,ed administrative costs to the order as %P
art of the cost of doing business.%
)e-uired:
A. 'ne of Cornell's staff accountants #ants to reDect the secial order because %financially"
it's a loser.% !o you agree #ith this conclusion if Cornell currently has e,cess caacity/
0ho# calculations to suort your ans#er.
B. 1f Cornell currently has no e,cess caacity" should the order be reDected from a financial
ersective/ Briefly e,lain.
C. Assume that Cornell currently has no e,cess caacity. 8ould outsourcing be an otion
that Cornell could consider if management truly #anted to do business #ith 4ale/ Briefly
discuss" citing several key considerations for Cornell in your ans#er.
&': 2" 3 (ye: A" 5
175 Hilton, Managerial Accounting, Seventh Edition
Ans#er:
A. 5o" the conclusion is incorrect because the order generates a net contribution of @66"???
for the firm. 5ote: (he fi,ed administrative cost is irrelevant to the decision.
0elling rice @113
&ess: !irect materials :@23 - @2; @21
!irect labor .?
Eariable manufacturing overhead :* hours , @<Q; 19 9<
Gnit contribution margin @ *6
(otal contribution margin :."??? units , @*6; @79"???
&ess: Additional set-u costs @9"7??
0ecial device .".?? 1*"???
5et contribution to rofit @66"???
Q+i,ed manufacturing overhead: @6*2"??? R *2"??? labor hours J @*6 er hour
Eariable manufacturing overhead: @.3 - @*6 J @<
B. 4es" the order should be reDected. An environment of no e,cess caacity imlies a very
strong marketlace. Cornell #ould be giving u sales at @19? er faucet" to be relaced
#ith sales of @113 er unit and the need to incur additional set-u costs and the cost of a
secial device. Comany rofitability #ould suffer.
C. 4es" outsourcing is an otion. Cornell could have another manufacturer roduce the
faucets for 4ale or erhas even for another customer. >rice" roduct -uality" and sulier
reliability #ould be imortant considerations in this decision.
Chapter 14 176
Otsorcin%
6<. 0t. =oseh Fosital has been hit #ith a number of comlaints about its food service from
atients" emloyees" and cafeteria customers. (hese comlaints" couled #ith a very tight
local labor market" have romted the organization to contact 5ation#ide 1nstitutional +ood
0ervice :51+0; about the ossibility of an outsourcing arrangement.
(he hosital's business office has rovided the follo#ing information for food service for the
year Dust ended: food costs" @9<?"???A labor" @93"???A variable overhead" @.3"???A allocated
fi,ed overhead" @6?"???A and cafeteria food sales" @9?"???.
Conversations #ith 51+0 ersonnel revealed the follo#ing information:
51+0 #ill charge 0t. =oseh Fosital @12 er day for each atient served. 5ote: (his
figure has been %marked u% by 51+0 to reflect the firm's cost of oerating the hosital
cafeteria.
0t. =oseh's *3?-bed facility oerates throughout the year and tyically has an average
occuancy rate of 7?I.
&abor is the rimary driver for variable overhead. 1f an outsourcing agreement is
reached" hosital labor costs #ill dro by <?I. 51+0 lans to use 0t. =oseh facilities for
meal rearation.
Cafeteria food sales are e,ected to increase by 13I because 51+0 #ill offer an
imroved menu selection.
)e-uired:
A. 8hat is meant by the term %outsourcing%/
B. 0hould 0t. =oseh outsource its food-service oeration to 51+0/
C. 8hat factors" other than dollars" should 0t. =oseh consider before making the
final decision/
&': 2" 3 (ye: A" 5
Ans#er:
A. 'utsourcing is essentially a make-or-buy decision" that is" roducing a roduct or service
in-house or urchasing it from an e,ternal sulier.
B. (he hosital #ould be better off to outsource its food-service oeration" benefiting by
@113"73? :@<.?"??? - @912"*3?;. 5ote: (he allocated overhead is not a relevant decision
factor.
0t. =oseh 51+0
+ood cost @9<?"??? @ ---
&abor :@93"???A @93"??? , 1?I; 93"??? 9"3??
Eariable overhead :@.3"???A @.3"??? , 1?I; .3"??? ."3??
Cafeteria food sales :@9?"???A @9?"??? , 113I; :9?"???; :<*"???;
51+0 charges :*3? beds , 7?I , .63 days , @12; --- 9<2"*3?
5et cost @<.?"??? @912"*3?
C. +actors to consider #ould include imrovement in food -uality" reliability of 51+0"
177 Hilton, Managerial Accounting, Seventh Edition
elimination of labor roblems" and data validity in future years.
Store Closre
7?. >aa +red's >izza store no. 16 has fallen on hard times and is about to be closed. (he
follo#ing figures are available for the eriod Dust ended:
0ales @*?3"???
Cost of sales 67"<??
Building occuancy costs:
)ent .6"3??
Gtilities 13"???
0ulies used 3"6??
8ages 77"7??
Miscellaneous *"2??
Allocated cororate overhead 16"9??
All emloyees e,cet the store manager #ould be discharged. (he manager" #ho earns
@*7"??? annually" #ould be transferred to store no. 1< in a neighboring suburb. Also" no. 16's
furnishings and e-uiment are fully dereciated and #ould be removed and transorted to
>aa +red's #arehouse at a cost of @*"9??.
)e-uired:
A. 8hat is store no. 16's reorted loss for the eriod Dust ended/
B. 0hould the store be closed/ 8hy/
C. 8ould >aa +red's likely lose all @*?3"??? of sales revenue if store no. 16 #ere closed/
$,lain.
&': 2" 3 (ye: A" 5
Ans#er:
A. 0ales @*?3"???
&ess:
Cost of sales @67"<??
)ent .6"3??
Gtilities 13"???
0ulies used 3"6??
8ages 77"7??
Miscellaneous *"2??
Allocated cororate overhead 16"9?? **1"<??
'erating income :loss; @ :16"<??;
B. 5o" the store should continue in oeration. (#o of the costs included in the receding
total are not relevant for the decision. >aa +red's #ill continue to incur the costs of the
store manager :@*7"???; and allocated cororate overhead :@16"9??; regardless of the
decision" resulting in %relevant oerating income% of @*6"<?? S@*?3"??? T :@**1"<?? -
@*7"??? - @16"9??;U if store no. 16 remains oen. Additionally" >aa +red's #ould avoid
the @*"9?? cost associated #ith e-uiment removal.
Chapter 14 17
C. >robably not. 1f the store is closed" loyal customers may go to another location. (he firm
#ill lose some sales" but the likelihood of losing the entire @*?3"??? revenue ool is lo#.
17! Hilton, Managerial Accounting, Seventh Edition
Evalation o& a Service Line
71. %1t's close to a @2?"??? loser and #e ought to devote our efforts else#here"% noted Kara
8hitmore" after revie#ing financial reorts of her comany's attemt to offer a reduced-rice
daycare service to emloyees. (he daycare's financial figures for the year Dust ended follo#.
)evenues @1*?"???
Eariable costs 23"???
(raceable fi,ed costs 9<"???
Allocated cororate overhead *2"???
1f the daycare serviceHcenter is closed" 7?I of the traceable fi,ed cost #ill be avoided. 1n
addition" the comany #ill incur one-time closure costs of @6"9??.
)e-uired:
A. 0ho# calculations that suort Kara 8hitmore's belief that the daycare center lost almost
@2?"???.
B. 0hould the center be closed/ 0ho# calculations to suort your ans#er.
C. 8hat roblem might the comany e,erience if the center is closed/
&': 2" 3 (ye: A" 5
Ans#er:
A. )evenues @1*?"???
&ess: Eariable costs @23"???
(raceable fi,ed costs 9<"???
Allocated cororate overhead *2"??? 139"???
'erating income :loss; @:.9"???;
B. (he comany #ould be better-off to continue the daycare service" as the cost of
closure e,ceeds the benefit of on-going oeration:
Contribution margin lost :@1*?"??? - @23"???; @:73"???;
0avings in traceable fi,ed costs :@9<"??? , 7?I; 6*".??
'ne-time closure cost :6"9??;
Benefit :cost; of closure @:1<"3??;
C. (he center is a fringe benefit for emloyees. 8ithout the service" the comany may
lose some key eole and have trouble attracting ne# hires. $ven if the center
roduces a small loss" 8hitmore should not be alarmed" as fringe benefits rarely have
a zero rice tag.
Chapter 14 10
Ma'e or ()$ Capacit) Constraint
7*. +o#ler 1ndustries roduces t#o bearings: C13 and C1<. !ata regarding these t#o bearings
follo#.
C13 C1<
Machine hours re-uired er unit * .?? * .3?
0tandard cost er unit:
!irect material @ *.3? @ 2.??
!irect labor 3.?? 2.??
Manufacturing overhead:
EariableQ ..?? *.3?
+i,edQQ 2 .?? 3 .??
(otal @12 .3? @13 .3?
QAlied on the basis of direct labor hours
QQAlied on the basis of machine hours
(he comany re-uires 9"??? units of C13 and 11"??? units of C1<. )ecently" management
decided to devote additional machine time to other roduct lines" resulting in only .1"???
machine hours er year that can be dedicated to roduction of the bearings. An outside
comany has offered to sell +o#ler the bearings at rices of @1..3? for C13 and @1..3? for
C1<.
)e-uired:
A. Assume that +o#ler decided to roduce all C13s and urchase C1<s only as needed.
!etermine the number of C1<s to be urchased.
B. Comute the net benefit to the firm of manufacturing :rather than urchasing; a unit of
C13. )eeat the calculation for a unit of C1<.
C. +o#ler lacks sufficient machine time to roduce all of the C13s and C1<s needed. 8hich
comonent :C13 or C1<; should +o#ler manufacture first #ith the limited machine hours
available/ 8hy/ Be sure to sho# all suorting comutations.
&': 3" 6 (ye: A
11 Hilton, Managerial Accounting, Seventh Edition
Ans#er:
A. Machine hours available .1"???
&ess: Machine hours for C13 :9"??? , *; 16"???
Machine hours available for C1< 13"???
Machine hours er unit of C1< R *.3
Gnits to be manufactured 6"???
Annual re-uirement 11"???
&ess: Gnits to be manufactured 6"???
C1<s to urchase 3"???
B. C13 C1<
!irect material @ *.3? @ 2.??
!irect labor 3.?? 2.??
Eariable overhead ..?? *.3?
(otal variable cost @1?.3? @1?.3?
>urchase rice -uoted @1..3? @1..3?
&ess: (otal variable cost 1?.3? 1?.3?
5et benefit er unit of manufacturing @ ..?? @ ..??
C. C13 consumes * hours of machine time" thus roviding a net benefit of @1.3? er hour :@.
R *;. 1n contrast" C1< consumes *.3 hours of time and roduces a benefit of @1.*? er
hour :@. R *.3;. 'n the basis of this information" the comany should focus on C13.
Chapter 14 12
Use o& E*cess Pro#ction Capacit)
7.. &ee Comany has met all roduction re-uirements for the current month and has an
oortunity to manufacture additional units #ith its e,cess caacity. Gnit selling rices and
unit costs for three roduct lines follo#.
>lain )egular 0uer
0elling rice @2? @33 @63
!irect material 1* 16 **
!irect labor :at @*? er hour; 1? 13 *?
Eariable overhead 9 1* 16
+i,ed overhead 6 7 9
Eariable overhead is alied on the basis of direct labor dollars" #hereas fi,ed overhead is
alied on the basis of machine hours. (here is sufficient demand for the additional
manufacture of all roducts.
)e-uired:
A. 1f &ee Comany has e,cess machine caacity and can add more labor as needed :i.e."
neither machine caacity nor labor is a constraint;" #hich roduct is the most attractive to
roduce/
B. 1f &ee Comany has e,cess machine caacity but a limited amount of labor time available"
#hich roduct or roducts should be manufactured in the e,cess caacity/
&': 3" 6 (ye: A
Ans#er:
A. >lain )egular 0uer
0elling rice @2? @33 @63
!irect material @1* @16 @**
!irect labor 1? 13 *?
Eariable overhead 9 1* 16
(otal variable cost @.? @2. @39
Gnit contribution margin @1? @1* @ 7
8hen there is no limit on roduction caacity" )egular should be manufactured because
it has the highest contribution margin er unit.
B. >lain )egular 0uer
Gnit contribution margin @1? @1* @7
!irect labor hours re-uired :!&@ R @*?; R ?.3? R ?.73 R 1.??
Contribution margin er direct labor hour @*? @16 @7
8hen labor is in short suly" >lain should be manufactured because it has the highest
contribution margin er direct labor hour.
13 Hilton, Managerial Accounting, Seventh Edition
+oint Costs, -llocation an# Decision Ma'in%
72. )iverside Comany manufactures B and F in a Doint rocess. (he Doint costs amount to
@9?"??? er batch of finished goods. $ach batch yields *?"??? liters" of #hich 2?I are B and
6?I are F. (he selling rice of B is @9.73 er liter" and the selling rice of F is @13.?? er
liter.
)e-uired:
A. 1f the Doint costs are allocated on the basis of the roducts' sales value at the slit-off oint"
#hat amount of Doint cost #ill be charged to each roduct/
B. )iverside has discovered a ne# rocess by #hich B can be refined into >roduct BB"
#hich has a sales rice of @1* er liter. (his additional rocessing #ould increase costs
by @*.1? er liter. Assuming there are no other changes in costs" should the comany use
the ne# rocess/ 0ho# calculations.
&': 6 (ye: A
Ans#er:
A. $ach batch of *?"??? liters yields 9"??? liters of B :2?I; and 1*"??? liters of F :6?I;.
(hus" the sales values at slit-off are: B" @7?"??? :9"??? , @9.73; and F" @19?"???
:1*"??? , @13.??;" for a total of @*3?"???. (he Doint cost allocation is:
B: :@7?"??? R @*3?"???; , @9?"??? J @**"2??
F: :@19?"??? R @*3?"???; , @9?"??? J @37"6??
B. 1ncremental revenue er liter :@1*.?? - @9.73; @ ..*3
&ess: 1ncremental costs er liter *.1?
1ncremental rofit er liter @ 1.13
Eolume in liters , 9"???
1ncremental rofit @ <"*??
)iverside should go ahead #ith the ne# rocess as it is rofitable for the firm.
Chapter 14 14
+oint Costs, -llocation$ Focs on Decision Ma'in%
73. 0to#ers Cororation manufactures roducts =" K" and & in a Doint rocess. (he comany
incurred @29?"??? of Doint rocessing costs during the eriod Dust ended and had the follo#ing
data that related to roduction:
0ales Ealues and Additional
Cost if >rocessed Beyond 0lit-off
>roduct 0ales Ealue at 0lit-off 0ales Ealue Additional Cost
= @2??"??? @33?"??? @1.?"???
K .3?"??? 32?"??? *2?"???
& 93?"??? <73"??? 119"???
An analysis revealed that all costs incurred after the slit-off oint are variable and directly
traceable to the individual roduct line.
)e-uired:
A. 1f 0to#ers allocates Doint costs on the basis of the roducts' sales values at the slit-off oint"
#hat amount of Doint cost #ould be allocated to roduct =/
B. 1f roduction of = totaled 3?"??? gallons for the eriod" determine the relevant cost er gallon
that should be used in decisions that e,lore #hether to sell at the slit-off oint or rocess
further/ Briefly e,lain your ans#er.
C. At the beginning of the current year" 0to#ers decided to rocess all three roducts beyond the
slit-off oint. 1f the comany desired to ma,imize income" did it err in regards to its decision
#ith roduct =/ >roduct K/ >roduct &/ By ho# much/
&': 6 (ye: A" 5
Ans#er:
A. (he total sales value at slit-off amounts to @1"6??"??? :@2??"??? N @.3?"??? N @93?"???.
0ince = has *3I of the sales value :@2??"??? R @1"6??"???;" 0to#ers #ould allocate @1*?"???
of Doint cost :@29?"??? , *3I;.
B. =oint costs are not relevant in making this decision because the amounts have already been
incurred and are the same regardless of #hat the comany decides to do. (he only relevant
cost is cost incurred beyond the slit-off" #hich for = amounts to @*.6? er gallon :@1.?"??? R
3?"??? gallons;.
C. As noted in art %B"% Doint cost is not relevant for sell at slit vs. rocess further decisions.
)ather" one must e,lore differential revenue vs. differential cost" as follo#s:
=: :@33?"??? - @2??"???; vs. @1.?"??? J @*?"???
K: :@32?"??? - @.3?"???; vs. @*2?"??? J @:3?"???;
&: :@<73"??? - @93?"???; vs. @119"??? J @7"???
(he comany erred in rocessing K beyond the slit oint and lost @3?"??? in the rocess.
15 Hilton, Managerial Accounting, Seventh Edition
DISCUSSION QUESTIONS
C.aracteristics o& In&or!ation &or Decision Ma'in%
76. 1nformation is said to be useful in decision making if it ossesses three characteristics.
)e-uired:
A. &ist the three characteristics of useful information.
B. +re-uently" there is a conflict bet#een t#o of the characteristics re-uested in art %A.%
Briefly e,lain #hat this conflict is.
C. 8hat distinguishes relevant from irrelevant information/
&': . (ye: )C
Ans#er:
A. (he three characteristics are relevance" accuracy" and timeliness.
B. Accuracy fre-uently can be enhanced if more time is used to develo" obtain" or analyze
information. (hus" in order to meet deadlines for decisions" information may have to be
develoed that is less accurate than desired.
C. )elevant information is ertinent to the decision" that is" it has the otential to influence
the decision. 0ecifically" future costs and revenues that differ among alternatives must
be considered. 1n contrast" irrelevant information includes ast conditions as #ell as
future conditions that #ill not be affected by the choice among alternatives.
Chapter 14 16
Distinctions (et/een Sn' Costs an# Opportnit) Costs
77. 0unk costs and oortunity costs are inherent in decision making.
)e-uired:
A. !efine the terms %sunk cost% and %oortunity cost.%
B. Fo# are sunk costs treated #hen making decisions/
C. %1nformation about sunk costs can be found in the financial statements and accounting
recordsA ho#ever" information about oortunity costs is omitted.% !o you agree #ith this
statement/ $,lain.
&': 2 (ye: )C" 5
Ans#er:
A. A sunk cost is a ast cost that #ill remain the same no matter #hich of the alternatives
under consideration is chosen. An oortunity cost is the otential benefit given u #hen
the choice of one alternative re-uires the sacrifice of another. 'ortunity cost is
measured by using the net benefit of the best alternative not taken.
B. 0unk costs should be ignored #hen making decisions" as one cannot change #hat has
haened in the ast.
C. 4es. (he accounting system is historicalA its main focus is on events that have occurred.
Conse-uently" information about sunk costs #ill be found in the financial statements and
accounting records. 'n the other hand" oortunity costs refer to the benefits from
alternatives that are not selected. Because these alternatives #ere not chosen" an historical
system #ill not include any measures of these costs.
Capacit) Restrictions
79. Caacity restrictions often change the #ay that managers make decisions. +or e,amle"
consider a retailer that has limited s-uare footage in its store. 8hat guideline should be used
in deciding #hich ne# roducts to carry/ Fo# #ould this differ" say" from a concert
romoter that desires to bring a rock grou to an arena-tye facility/
&': 6 (ye: )C" 5
Ans#er:
8hen a single scarce resource is resent" decisions should be made on the basis of the
contribution margin er unit of scarce resource. 1n this case" the retailer should focus on the
contribution margin er s-uare foot. (his same rincile can be used by the concert romoter"
#ho #ill study the contribution margin er seat.
17 Hilton, Managerial Accounting, Seventh Edition