Testbank Chapter 11 Decision Making and Relevant Information

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Cost Accounting, 14e (Horngren/Datar/Rajan)

Chapter 11 Decision Making and Relevant Information

Objective 11.1

1) A decision model involves:

A) only quantitative analyses

B) both quantitative and qualitative analyses

C) only qualitative analyses

D) a manager‘s instinct

Answer: B

Diff: 1

Terms: decision model

Objective: 1

AACSB: Reflective thinking

2) Feedback regarding previous actions may affect:

A) future predictions

B) implementation of the decision

C) the decision model

D) All of these answers are correct.

Answer: D

Diff: 2

Terms: decision model

Objective: 1

AACSB: Reflective thinking

3) Place the following steps from the five–step decision process in order:

A = Make predictions about future costs

B = Evaluate performance to provide feedback

C = Implement the decision

D = Choose an alternative

A) A D B C

B) C D A B

C) A D C B

D) D C B A

Answer: C

Diff: 2

Terms: decision model

Objective: 1

AACSB: Reflective thinking

2

4) The formal process of choosing between alternatives is known as a(n):

A) relevant model

B) decision model

C) alternative model

D) prediction model

Answer: B

Diff: 1

Terms: decision model

Objective: 1

AACSB: Reflective thinking

5) Ruttles Circuit Company manufactures circuit boards for other firms. Management is attempting to

search for ways to reduce manufacturing labor costs and has received a proposal from a consulting

company to rearrange the production floor next year. Using the information below regarding current

operations and the new proposal, which of the following decisions should management accept?

Currently Proposed

Required machine operators 4 3

Materials–handling workers 1.50 1.50

Employee average pay $10 per hour $12 per hour

Hours worked per employee 2,100 2,000

A) Do not change the production floor.

B) Rearrange the production floor.

C) Either, because it makes no difference to the employees.

D) It doesn‘t matter because the costs incurred will remain the same.

Answer: B

Explanation: B) Current operations: 4 workers × 2,100 hours × $10.00 = $84,000

Proposal: 3 workers × 2,000 hours × $12.00 = $72,000

Diff: 2

Terms: decision model

Objective: 1

AACSB: Analytical skills

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Answer the following questions using the information below:

Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a

unit for the coming year. With a 50–cent price increase, demand is expected to fall by 6,000 units.

Currently Projected

Demand 40,000 units 34,000 units

Selling price $4.50 $5.00

Incremental cost per unit $3.00 $3.00

6) If the price increase is implemented, operating profit is projected to:

A) increase by $8,000

B) decrease by $8,000

C) increase by $12,000

D) decrease by $9,000

Answer: A

Explanation: A) [34,000 × ($5 – $3)] – [40,000 × ($4.50 – $3.00)] = increase of $8,000

Diff: 2

Terms: decision model

Objective: 1

AACSB: Analytical skills

7) Would you recommend the 50–cent price increase?

A) No, because demand decreased.

B) No, because the selling price increases.

C) Yes, because contribution margin per unit increases.

D) Yes, because operating profits increase.

Answer: D

Diff: 2

Terms: decision model

Objective: 1

AACSB: Analytical skills

8) When using the five–step decision process, which one of the following steps should be done last?

A) Obtain information

B) Choose an alternative

C) Evaluation and feedback

D) Implementing the decision

Answer: C

Diff: 2

Terms: decision model

Objective: 1

AACSB: Reflective thinking

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9) When using the five–step decision process, which one of the following steps should be done first?

A) Obtain information

B) Choose an alternative

C) Evaluation and feedback

D) Implementing the decision

Answer: A

Diff: 2

Terms: decision model

Objective: 1

AACSB: Reflective thinking

10) A decision model is a formal method for making a choice, frequently involving both quantitative

and qualitative analyses.

Answer: TRUE

Diff: 1

Terms: decision model, quantitative factors, qualitative factors

Objective: 1

AACSB: Reflective thinking

11) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making

future predictions.

Answer: FALSE

Explanation: Historical costs may be helpful in making future predictions, but are not relevant costs for

decision making.

Diff: 2

Terms: relevant costs

Objective: 1

AACSB: Communication

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12) The textbook discusses a five–step decision process. Briefly explain each of the five steps.

Answer: The five step decision process is (a) obtain information, (b) make predictions, (c) choose an

alternative, (d) implement the decision, and (e) evaluate performance to provide feedback.

Obtaining information involves collecting all data pertinent to the decision situation, both quantitative

and qualitative, and determining which information is relevant to the decision, and determining which

alternatives are being considered.

Making predictions involves using the information obtained above and attempting to predict what the

future costs and benefits will be for each of the various alternatives.

Choosing an alternative involves comparing the predicted benefits of each alternative with each of the

predicted costs (as well as other non–quantitative factors), and selecting an alternative that maximizes

the difference between the expected benefits and the expected costs.

Implementing the decision involves actually doing the alternative selected above and making all the

necessary changes in operations to support the decision.

Evaluating the performance of the decision involves learning from the results of the decision and seeing

which predictions were accurate and determining how to avoid any difficulties encountered in either the

decision–process or the implementation.

Diff: 2

Terms: decision model

Objective: 1

AACSB: Reflective thinking

Objective 11.2

1) For decision making, a listing of the relevant costs:

A) will help the decision maker concentrate on the pertinent data

B) will only include future costs

C) will only include costs that differ among alternatives

D) All of these answers are correct.

Answer: D

Diff: 2

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

2) Sunk costs:

A) are historical costs

B) cannot be changed

C) are never relevant

D) all of the above

Answer: D

Diff: 2

Terms: sunk costs

Objective: 2

AACSB: Reflective thinking

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3) Sunk costs:

A) are relevant

B) are differential

C) have future implications

D) are ignored when evaluating alternatives

Answer: D

Diff: 1

Terms: relevant costs, sunk costs

Objective: 2

AACSB: Reflective thinking

4) A car purchased last year is an example of a(n):

A) sunk cost

B) relevant cost

C) differential cost

D) avoidable cost

Answer: A

Diff: 1

Terms: sunk costs

Objective: 2

AACSB: Use of Information Technology

5) Costs that CANNOT be changed by any decision made now or in the future are:

A) fixed costs

B) indirect costs

C) avoidable costs

D) sunk costs

Answer: D

Diff: 1

Terms: sunk costs

Objective: 2

AACSB: Reflective thinking

6) In evaluating different alternatives, it is useful to concentrate on:

A) variable costs

B) fixed costs

C) total costs

D) relevant costs

Answer: D

Diff: 1

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

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7) Which of the following costs always differ among future alternatives?

A) fixed costs

B) historical costs

C) relevant costs

D) variable costs

Answer: C

Diff: 1

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

8) Which of the following costs are NEVER relevant in the decision–making process?

A) fixed costs

B) historical costs

C) relevant costs

D) variable costs

Answer: B

Diff: 1

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

Answer the following questions using the information below:

John‘s 8–year–old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy

again. His wife, Sherry, suggested that he should buy a 5–year–old used Jeep Grand Cherokee instead for

$6,000 cash. Sherry estimated the following costs for the two cars:

Trail Blazer Grand Cherokee

Acquisition cost $25,000 $6,000

Repairs $ 6,000

Annual operating costs

(Gas, maintenance, insurance) $ 2,280 $2,100

9) The cost NOT relevant for this decision is the:

A) acquisition cost of the Trail Blazer

B) acquisition cost of the Grand Cherokee

C) repairs to the Trail Blazer

D) annual operating costs of the Grand Cherokee

Answer: A

Diff: 2

Terms: relevant costs

Objective: 2

AACSB: Analytical skills

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10) What should John do? What are his savings in the first year?

A) Buy the Grand Cherokee; $8,100

B) Fix the Trail Blazer; $3,180

C) Buy the Grand Cherokee; $180

D) Fix the Trail Blazer; $6,280

Answer: C

Explanation: C) Trail Blazer ($6,000 + $2,280) – Grand Cherokee ($6,000 + $2,100) = $180 cost

savings with the Grand Cherokee option

Diff: 2

Terms: relevant costs

Objective: 2

AACSB: Analytical skills

11) A relevant revenue is a revenue that is a(n):

A) past revenue

B) future revenue

C) in–hand revenue

D) earned revenue

Answer: B

Diff: 2

Terms: relevant revenues

Objective: 2

AACSB: Reflective thinking

12) A relevant cost is a cost that is a (n):

A) future cost

B) past cost

C) sunk cost

D) non–cash expense

Answer: A

Diff: 2

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

13) Relevant information has all of these characteristics EXCEPT:

A) past costs are irrelevant

B) all future revenues and expenses are relevant

C) different alternatives can be compared by examining differences in total revenue and expenses

D) qualitative factors should be considered

Answer: B

Diff: 2

Terms: relevant revenues, relevant costs

Objective: 2

AACSB: Reflective thinking

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14) Quantitative factors:

A) include financial information, but not nonfinancial information

B) can be expressed in monetary terms

C) are always relevant when making decisions

D) include employee morale

Answer: B

Diff: 2

Terms: quantitative factors

Objective: 2

AACSB: Reflective thinking

15) Qualitative factors:

A) generally are easily measured in quantitative terms

B) are generally irrelevant for decision making

C) may include either financial or nonfinancial information

D) include customer satisfaction

Answer: D

Diff: 2

Terms: qualitative factors

Objective: 2

AACSB: Reflective thinking

16) Historical costs are helpful:

A) for making future predictions

B) for decision making

C) because they are quantitative

D) None of these answers is correct.

Answer: A

Diff: 2

Terms: relevant costs

Objective: 2

AACSB: Reflective thinking

17) When making decisions:

A) quantitative factors are the most important

B) qualitative factors are the most important

C) appropriate weight must be given to both quantitative and qualitative factors

D) both quantitative and qualitative factors are unimportant

Answer: C

Diff: 2

Terms: qualitative factors, quantitative factors

Objective: 2

AACSB: Ethical reasoning

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18) Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:

A) qualitative factor

B) quantitative factor

C) nonmeasurable factor

D) financial factor

Answer: A

Diff: 1

Terms: qualitative factors

Objective: 2

AACSB: Reflective thinking

19) Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision–

making process, these costs are considered to be:

A) fixed

B) qualitative factors

C) quantitative factors

D) variable

Answer: C

Diff: 1

Terms: qualitative factors

Objective: 2

AACSB: Reflective thinking

20) One–time–only special orders should only be accepted if:

A) incremental revenues exceed incremental costs

B) differential revenues exceed variable costs

C) incremental revenues exceed fixed costs

D) total revenues exceed total costs

Answer: A

Diff: 3

Terms: one–time–only special order, incremental revenue

Objective: 2

AACSB: Reflective thinking

21) When deciding to accept a one–time–only special order from a wholesaler, management should do all

of the following EXCEPT:

A) analyze product costs

B) consider the special order‘s impact on future prices of their products

C) determine whether excess capacity is available

D) verify past design costs for the product

Answer: D

Diff: 3

Terms: one–time–only special order

Objective: 2

AACSB: Reflective thinking

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22) When there is excess capacity, it makes sense to accept a one–time–only special order for less than

the current selling price when:

A) incremental revenues exceed incremental costs

B) additional fixed costs must be incurred to accommodate the order

C) the company placing the order is in the same market segment as your current customers

D) it never makes sense

Answer: A

Diff: 3

Terms: one–time–only special order, incremental cost, incremental revenue

Objective: 2

AACSB: Reflective thinking

23) Full cost of the product is:

A) the sum of fixed costs in all the business functions of the value chain

B) the sum of variable costs in all the business functions of the value chain

C) the sum of all variable and fixed costs in all the business functions of the value chain

D) the sum of all costs in the value chain minus marketing costs

Answer: C

Diff: 3

Terms: full costs of the product

Objective: 2

AACSB: Reflective thinking

Answer the following questions using the information below:

Kolar Manufacturing is approached by a European customer to fulfill a one–time–only special order for a

product similar to one offered to domestic customers. Kolar Manufacturing has excess capacity. The

following per unit data apply for sales to regular customers:

Variable costs:

Direct materials $80

Direct labor 40

Manufacturing support 70

Marketing costs 30

Fixed costs:

Manufacturing support 90

Marketing costs 30

Total costs 340

Markup (50%) 170

Targeted selling price $510

24) What is the full cost of the product per unit?

A) $220

B) $340

C) $510