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RELEVANT COSTING (Enrichment Acitivity)

1. What is the first step in the decision making process?

A. Specify the criteria by which the decision is to be made.
B. Consider the strategic issues regarding the decision context.
C. Perform an analysis in which the relevant information is developed and analyzed.
D. Compare the alternatives.

2. A major accounting contribution to the managerial decision-making process in evaluating possible

courses of action is to
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent on a project.
D. decide which actions that the management should consider.

3. An analysis of relevant costs and relevant revenues

E. Will enable the decision maker to assess a decision’s impact on profit
F. Is useful in assessing a variety of alternative decisions
G. Provides sufficient and complete evidence with which to make a decision
H. Answers a. and b. are correct

4. Sunk costs are

a. Costs that increase due to a higher volume of activity or the performance of an additional
b. Costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
c. The profits that a company forgoes by following a particular course of action
d. Costs that were incurred prior to making a decision

5. A sunk cost is:

a. a cost incurred in the past and not relevant to any future course of action.
b. an opportunity cost.
c. useful in analysis of alternative courses of action.
d. relevant to current decision making.

6. Which of the following is least likely to be a relevant item in deciding whether to replace an old
a. acquisition cost of the old machine
b. outlay to be made for the new machine
c. annual savings to be enjoyed on the new machine
d. life of the new machine

7. An important concept in decision making is described as “the contribution to income that is forgone
by not using a limited resource in its best alternative use.” This concept is called
A. Marginal cost C. Incremental cost
B. Cost outlay D. Opportunity cost

8. An “opportunity cost” is
A. the difference in total costs that results from selecting one alternative instead of another
B. the profit forgone by selecting one alternative instead of another
C. a cost that may be saved by not adopting an alternative
D. a cost that may be shifted to the future with little or no effect on current operations
8. Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20 per unit
for the year. Variable manufacturing costs were budgeted at P8 per unit, and fixed manufacturing
costs at P 5 per unit. A special order offering to buy 40,000 lamps for P11.50 each was received by
Venus in April. Venus has sufficient plant capacity to manufacture the additional quantity of lamps;
however, the production would have to be done by the present work force on an overtime-basis at an
estimated additional cost of P1.50 per lamp. Venus will not incur any selling expenses as a result of
the special order. Venus Company would have a unit relevant cost of
A. P 8.00 C. P 9.50
B. P13.00 D. P14.50

10. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of
capacity. Bearings normally sell for P60 each, and cost an average of P50 to make, including a share
of the monthly fixed costs of P180,000. Ilog Corp has offered to buy 1,000 bearings at P40 each.
What is the relevant cost per unit?
A. P 20 C. P 40
B. P 30 D. P 50

11. Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of P60
per component. Luzon prefers to purchase 5,000 units per month, but its supplier could not
guarantee this delivery schedule. In order to ensure availability of these components, Luzon is
considering the purchase of all the 60,000 units at the beginning of the year. Assuming Luzon can
invest cash at 8%, the company’s opportunity cost of purchasing all the 60,000 units at the
beginning of the year is

A. P132,000 C. P144,000
B. P150,000 D. P264,000

12.For the past 12 years, the JLO Company has produced the small electric motors that fit into
its main product line of dental drilling equipment. As materials costs have steadily increased, the
controller of the JLO Company is reviewing the decision to continue to make the small motors and
has identified the following facts:
1) The equipment which is used to manufacture the electric motors has a book value of
2) The space being occupied now by the electric motor manufacturing department could be
used to eliminate the need for storage space which is presently being rented.
3) Comparable units can be purchased from an outside supplier for P597.50.
4) Four of the people who work in the electric motor manufacturing department would be
terminated and given eight weeks of separation pay.
5) A P750,000 unsecured note is still outstanding on the equipment that is being
used in the manufacturing process.
Which of the items above are relevant to the decision that the controller has to make?
A. 1, 2, 4, and 5 C. 1, 3, 4, and 5
B. 1, 3, and 4 D. 2, 3, and 4

13. A business is operating at 90% of capacity and is currently purchasing a part which is being
used in its manufacturing operations for P15 per unit. The unit cost for the business to make
the part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the
part are normally purchased during the year but could be manufactured using unused
capacity, what would be the amount of differential cost, increase or decrease, from making
the part rather than purchasing it?
A. P150,000 cost increase C. P150,000 cost decrease
B. P 90,000 cost decrease D. P 90,000 cost increase
14.. Alfaro's Manufacturing Company can make 100 units of a necessary component part
with the
following costs:
Direct Materials P80,000
Direct Labor 13,000
Variable Overhead 40,000
Fixed Overhead 27,000
If Alfaro's Manufacturing Company can purchase the component externally for P145,000 and
only P4,000 of the fixed costs can be avoided, what is the correct “make or buy” decision?
A. Make and save P8,000 C. Make and save P20,000
B. Buy and save P8,000 D. Buy and save P20,000

15. In a make-or-buy decision, an opportunity cost that should be considered is the:

A. income that could be generated from idle production space.
B. total costs to produce the item
C. variable costs to produce the item
D. fixed costs to produce the item

16. The opportunity cost of making a component part in a factory with excess capacity for which there
is no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.

17. The cost of not receiving rent from a space because you decide to make the part rather than buying
it from an outside supplier is considered a(an)
A. sunk cost C. opportunity cost
B. future cost D. fixed cost

18 .Banahaw Company plans to discontinue a department that has a contribution margin of P240,000 and
P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The effect of this discontinuance on
Banahaw’s overall net operating income would be a(an)
A. decrease of P30,000 C. increase of P30,000
B. decrease of P10,000 D. increase of P10,000

19.Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are P600,000 per
ton, and fixed mining costs are P6,000,000. The segment margin for 2007 was P1,200,000. The management
of Mina Co. was considering dropping the mining of Gold Ore. Only one-half of the fixed expenses are direct
and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Mina Co.
A. Increase by P2,000,000 C. Decrease by P2,000,000
B. Increase by P1,200,000 D. Decrease by P1,200,000

20.Agimat Company plans to discontinue a segment with a P32,000 segment margin. Common expenses
allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were
closed. The effect of closing down the segment on Agimat Company’s before tax profit would be
A. P12,000 decrease C. P12,000 increase
B. P 7,000 decrease D. P 7,000 increase