Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 11 Decision Making and Relevant Information
Objective 11.1
1) A decision model involves a(n) ________.
A) informal method of making a choice at the lower level management using sensitivity analysis
B) formal method of making a choice that often involves both quantitative and qualitative analyses
C) informal method of making a choice which is discussed in detailed in the financial reports
D) formal method of making a choice at the lower level management using advanced management
techniques such as balance scorecard
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.
3) Place the following steps from the five-step decision process in order:
A = Obtain information including historical costs
B = Evaluate performance to provide feedback
C = Make decisions choosing among alternatives
D = Make predictions about the future
E = Identify the problem and uncertainties
A) A, E, D, B, C
B) C, D, E, A, B
C) E, A, D, C, B
D) D, C, B, A, E
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
5) Lander Metals Inc. manufactures automobile spare parts for car manufacturers. 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?
Current Proposed
Required machine operators 16 12
Materials-handling workers 3.00 3.00
Employee average pay $15 per hour $18 per hour
Hours worked per employee 3,400 3,150
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 the following questions using the information below:
Contrafic Lighting manufactures small flashlights and is considering raising the price by 75 cents a unit
for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.
Current Projected
Demand 75,000 units 68,000 units
Selling price $8.50 $9.25
Incremental cost per unit $4.80 $4.80
6) If the price increase is implemented, operating profit is projected to ________.
A) increase by $25,100
B) decrease by $5,250
C) increase by $5,250
D) decrease by $7,000
7) Would you recommend the 75-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.
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
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
10) A decision model is an informal method for making a choice, using simpler methods like surveying.
11) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making
future predictions.
12) Explain the five-step decision process that managers can use to make decisions.
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 historical costs
C) will only include costs that that are same among alternatives
D) will include both sunk costs and opportunity costs
2) Sunk costs ________.
A) are future costs for decision making
B) are avoidable costs
C) are irrelevant for decision making
D) are foregone contribution by not using a limited resource in its next-best alternative use
3) Sunk costs ________.
A) are relevant
B) are differential
C) have future implications
D) are ignored when evaluating alternatives
4) Which of the following is an example of sunk costs?
A) wages to security staffs
B) cost of purchasing raw materials
C) cost of an alternative investment
D) wages payable to skilled laborers to make a product
5) Sunk costs are ________.
A) costs incurred as a result of an investment position
B) costs that is the sum of all costs in a particular business function of the value chain
C) the contributions to operating income that is forgone by not using a limited resource in its next-best
alternative use
D) costs that are unavoidable and cannot be changed no matter what action is taken
6) In evaluating different alternatives, it is useful to concentrate on ________.
A) variable costs
B) fixed costs
C) total costs
D) relevant costs
7) Which of the following costs always differ among future alternatives?
A) fixed costs
B) historical costs
C) relevant costs
D) variable costs
8) Which of the following costs is relevant in a decision-making process?
A) prepaid insurance costs
B) historical costs
C) sunk costs
D) variable costs
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
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
11) A relevant revenue is revenue that is a(n) ________.
A) past revenue
B) future revenue
C) in-hand revenue
D) earned revenue
12) A relevant cost is a cost that is a(n) ________.
A) future cost
B) past cost
C) sunk cost
D) non-cash expense
13) Which of the following is true of relevant information?
A) All fixed costs are relevant.
B) Future revenues and expenses are relevant.
C) Past costs are not relevant.
D) All fixed costs are not relevant.
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
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
16) Which of the following is true of historical costs?
A) They are useful for making future predictions.
B) They are used for decision making.
C) They are always accounted as opportunity costs.
D) They cannot be fixed costs.
17) When making decisions ________.
A) more weightage should be given to qualitative factors
B) more weightage should be given to quantitative factors
C) appropriate weight must be given to both quantitative and qualitative factors
D) both quantitative and qualitative factors are unimportant
18) Employee morale at Dos Santos, Inc., is very high. This type of information is an example of ________.
A) qualitative factors
B) quantitative factors
C) irrelevant factors
D) financial factors
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) empirical costs
B) qualitative factors
C) quantitative factors
D) opportunity costs
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
21) When deciding to accept a one-time-only special order from a wholesaler, management should
________.
A) consider the sunk costs and opportunity costs
B) not 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
22) When there is an excess capacity, it makes sense to accept a one-time-only special order for less than
the current selling price if ________.
A) incremental revenues exceed incremental costs
B) additional fixed costs is incurred to accommodate the order
C) the company placing the order is in the same market segment as your current customers
D) incremental revenue equals incremental operating income
23) Full costs of a product are the sum of ________.
A) fixed costs and sunk costs in all the business functions of the value chain
B) variable costs and sunk costs in all the business functions of the value chain
C) all variable and fixed costs in all the business functions of the value chain
D) fixed costs, variable costs, and sunk costs in the value chain
Answer the following questions using the information below:
Coroid Manufacturers Inc. is approached by a European customer to fulfill a one-time-only special order
for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:
Variable costs:
Direct materials $120
Direct labor 60
Manufacturing support 105
Marketing costs 45
Fixed costs:
Manufacturing support 135
Marketing costs 45
Total costs 510
Markup (50%) 255
Targeted selling price $765
24) What is the full cost of the product per unit?
A) $330
B) $765
C) $510
D) $255
25) What is the contribution margin per unit?
A) $170
B) $220
C) $435
D) $510
26) For Coroid Manufacturers Inc., what is the minimum acceptable price of this special order?
A) $330
B) $290
C) $340
D) $510
27) What is the change in operating profits if the one-time-only special order for 1,000 units is accepted
for $540 a unit by Coroid?
A) $210,000 increase in operating profits
B) $30,000 increase in operating profits
C) $30,000 decrease in operating profits
D) $225,000 decrease in operating profits
28) Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are:
Direct materials $0.25
Direct labor 0.40
Variable overhead 0.15
Fixed overhead 0.20
Marketing – fixed 0.20
Marketing/distribution – variable 0.40
Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing
1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and
variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff
Company’s change in operating profits if the special order is accepted?
A) $400 increase in operating profits
B) $400 decrease in operating profits
C) $1,800 increase in operating profits
D) $1,800 decrease in operating profits
29) Snapper Tool Company has a production capacity of 3,000 units per month, but current production is
only 2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug
Levy offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the one-
time-only special order if only absorption-costing data are available?
A) Yes, good customer relations are essential.
B) No, the company will only break even.
C) No, since only the employees will benefit.
D) Yes, since operating profits will most likely increase.
Answer the following questions using the information below:
Contrafic’s Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:
Direct materials $546
Direct labor 360
Variable manufacturing support 54
Fixed manufacturing support 120
Total manufacturing costs 1,080
Markup (60%) 648
Targeted selling price $1,728
Contrafic’s Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $60 per unit. The average marketing cost of Contrafic’s Kitchens is $180 per
order.
30) For Contrafic’s Kitchens, what is the full cost of the one-time-only special order?
A) $1,020
B) $1,140
C) $1,080
D) $1,320
31) Other than price, what other items should Contrafic’s Kitchens consider before accepting this one-
time-only special order?
A) reaction of shareholders
B) reaction of existing customers to the lower price offered to Mr. Louis Cifer
C) demand for cherry cabinets
D) price is the only consideration
32) Which of the following costs is NOT considered to calculate the minimum acceptable price of a one-
time-only special order?
A) marketing costs
B) direct material costs
C) indirect material costs
D) special design costs
33) An example of a qualitative factor for the decision-making process is ________
A) customer satisfaction
B) employee wages
C) audit report
D) manufacturing overhead
34) Black Forrest is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the
lowest price Black Forrest should bid on this special order?
A) $12,600
B) $14,400
C) $18,000
D) $23,000
35) A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic
style. Black Forrest Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per
unit Black Forrest should bid on this long-term order?
A) $126
B) $144
C) $180
D) $270
36) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:
Direct materials $4.00
Direct labor 6.00
Variable overhead 3.00
Fixed overhead 1.00
Marketing—fixed 7.00
Marketing/distribution—variable 3.60
Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about
purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special
order. What is Zephram’s change in operating profits if the one-time-only special order is accepted?
A) $14,800 increase
B) $17,200 increase
C) $22,000 increase
D) $33,200 increase
37) The sum of all the costs incurred in a particular function, such as marketing, is called the ________.
A) business function cost
B) full product cost
C) opportunity cost
D) total manufacturing overhead
38) Business function costs are ________.
A) the sum of all fixed costs, sunk costs, and opportunity costs in a particular business function of the
value chain
B) the sum of all variable and fixed costs in a particular business function of the value chain
C) the sum of all variable and fixed costs in all business functions of the value chain
D) the sum of all fixed costs, sunk costs, and opportunity costs in all business functions of the value chain
39) Which of the following costs is irrelevant in the decision making of a special order when there is idle
production capacity?
A) fixed manufacturing costs
B) units sold
C) material cost
D) labor hours incurred
40) Which of the following is an appropriate step when identifying relevant costs to make a business
decision?
A) assuming all variable costs are relevant
B) assuming all fixed costs are irrelevant
C) separating total costs into business function costs and full costs
D) separating total costs into variable and fixed components
41) The best way to avoid misidentification of relevant costs is to focus on ________.
A) expected future costs that differ among the alternatives
B) historical costs
C) unit fixed costs
D) total unit costs
42) Factors used to decide whether to outsource a part include ________.
A) the supplier’s cost of direct materials
B) if the supplier is reliable
C) the original cost of equipment currently used for production of that part
D) past design costs used to develop the current composition of the part
43) Relevant costs are ________.
A) sunk costs
B) expected future costs
C) actual present costs
D) historical costs
44) Direct materials are $600, direct labor is $150, variable overhead costs are $450, and fixed overhead
costs are $300. The cost of one unit is ________.
A) $450
B) $750
C) $1200
D) $1500
45) Unit cost data can most mislead decisions by ________.
A) not computing fixed overhead costs
B) computing labor and materials costs only
C) computing administrative costs
D) not computing unit costs at the same output level
Answer the following questions using the information below:
Piels Corporation produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 10,000 units of this part are as follows:
Direct materials $ 90,000
Direct labor 130,000
Variable factory overhead 60,000
Fixed factory overhead 140,000
Total costs $420,000
Of the fixed factory overhead costs, $60,000 is avoidable.
46) Conners Company has offered to sell 10,000 units of the same part to Piels Corporation for $36 per
unit. Assuming there is no other use for the facilities, Schmidt should ________.
A) make the part, as this would save $6 per unit
B) buy the part, as this would save $6 per unit
C) buy the part, as this would save the company $60,000
D) make the part, as this would save $2 per unit
47) Assuming no other use of their facilities, the highest price that Piels should be willing to pay for
10,000 units of the part is ________.
A) $420,000
B) $280,000
C) $340,000
D) $360,000
48) Past costs themselves are always irrelevant when making decisions.
49) Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making
decisions.
50) The rent paid for an already existing facility is an example of a sunk cost.
51) A cost may be relevant for one decision, but NOT relevant for a different decision.
52) Revenues that remain the same for two alternatives being examined are relevant revenues.
53) Sunk costs are irrelevant to decision making.
54) Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.
55) A sunk cost is a relevant cost in a decision making.
56) Quantitative factors, such as direct material costs, are outcomes that are measured in numerical terms.
57) Qualitative factors are outcomes that can be easily measured in numerical terms, such as the costs of
direct labor.
58) Business function costs are the sum of all variable and fixed costs in all business functions of the value
chain.
59) Qualitative factors, as well as relevant revenues and relevant costs need to be considered when
selecting among alternatives.
60) Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter
what action is taken.
61) Full costs of a product include variable and fixed costs in a particular business function in the value
chain.