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Ateneo de Zamboanga University

School of Management and Accountancy


Management Advisory Services 2 (SY 2019-2020)
Long quiz #1: Relevant Costing

Name: ___________________________________________________________________ Date: ________________ Score: ________

INSTRUCTIONS: For multiple choice questions, circle your final answer for each item. No
alterations allowed for multiple choice questions. For problems, present your solutions
neatly on a separate sheet of paper. Write your final answer in the blank provided next to the
question in your questionnaire.

TEST I – THEORIES (2 points each)

1. Which of the following is not an effective way of dealing with a production constraint (i.e.,
bottleneck)?
a. Reduce the number of defective units produced at the bottleneck.
b. Pay overtime to workers assigned to the bottleneck.
c. Pay overtime to workers assigned to work stations located after the bottleneck in the
production process.
d. Subcontract work that would otherwise require use of the bottleneck.

2. The opportunity cost of making a component part in a factory with no excess capacity is the:
a. variable manufacturing cost of the component.
b. fixed manufacturing cost of the component.
c. cost of the production given up in order to manufacture the component.
d. net benefit foregone from the best alternative use of the capacity required.

3. A plant operating at capacity would suggest that:


a. every machine and person in the plant is working at the maximum possible rate.
b. only some specific machines or processes are operating at the maximum rate possible.
c. fixed costs will need to change to accommodate increased demand.
d. managers should produce those products with the highest contribution margin in order
to deal with the constrained resource.

4. In a decision-making case, which of the following costs is not likely to contain a relevant cost
component?
a. Labor cost
b. Selling cost
c. Depreciation cost of an existing asset
d. Factory overhead cost

5. Which of the following must be considered in determining the relevance of a particular cost to a
decision?
a. Verifiability and accuracy of the cost
b. Potential effect of the cost on the decision
c. Amount of cost
d. Riskiness of the decision
6. In a decision-making case, which of the following costs is generally not relevant to the decision?
a. Avoidable cost
b. Historical cost
c. Opportunity cost
d. Differential cost

7. A joint product is:


a. Any product which consists of several parts.
b. Any product produced by a firm with more than one product line.
c. Any product involved in a make or buy decision.
d. One of several products produced from a common input.

8. Statement I: One of the dangers of allocating common fixed costs to a product line is that such
allocations can make the line appear less profitable than it really is.
Statement II: Future costs that do not differ among the alternatives are not relevant in a
decision.
a. Only statement I is true.
b. Only statement II is true.
c. Both statements are true.
d. Both statements are false.

9. Statement I: Two or more different products that are manufactured in the same production
period are known as joint products.
Statement II: Joint production costs are relevant costs in decisions about what to do with a
product from the split-off point onward in the production process.
a. Only statement I is true.
b. Only statement II is true.
c. Both statements are true.
d. Both statements are false.

10. Statement I: The cost of a resource that has no alternative use in a make or buy decision
problem has an opportunity cost of zero.
Statement II: Variable costs are always relevant costs.
a. Only statement I is true.
b. Only statement II is true.
c. Both statements are true.
d. Both statements are false.
TEST II – PROBLEMS (5 points each)

1. Given for Blue Water Company are the following information:

Regular production and sales per year 60,000 units


Total fixed costs P 576,000
Total variable costs P 526,000
One-time-only special order received 12,000 units
Regular selling price per unit P 20
Special selling price per unit P 10

What is the incremental cost per unit of the special order? Answer: ______________

2. Grace Corporation has considerable excess capacity. During the month, it received a special
order at a price much lower that its regular price. The special order’s cost sheet shows the
following:

Materials P 8,000
Labor 12,000
Variable applied overhead 35,000
Fixed applied overhead 20,000

The applied fixed overhead includes an allocated P 5,000 for in-house design costs, although no
in-house design cost will be done for the special order. Instead, the job will require the use of
external designers for which the company will incur P 7,000.

What is the total amount to be included in the calculation to determine the minimum acceptable
price for the special order? Answer: _______________

3. Orbit Company produces three products, X, Y and Z. One machine is used to produce the three
products. Additional information is available as follows:

Products CM per unit Time on Machine Demand


X P 50.00 25 minutes 60 units
Y P 90.00 50 minutes 40 units
Z P 112.50 75 minutes 50 units

The machine can be operated 7 days a week, for 10 hours per day. How many units should
be produced for each product and sold to maximize the weekly contribution margin?

Answer: X ______________

Y ______________

Z ______________

4. Pretty Caterers quotes a price of P924 per person for a banquet dinner. This price includes 12%
VAT and 20% service charge, both of which are computed based on the food’s selling price. At
what amount does Pretty Caterers price the food? Answer: ____________

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