Chapter 13—Short-Run Decision Making: Relevant Costing
TRUE/FALSE
1. The first step in making a short-run decision is to identify alternatives as possible solutions to the
problem.
2. In making a short-run decision, all alternatives need to be considered.
3. In short-run decision making, the alternative with the lowest overall cost is always chosen.
4. Irrelevant costs are costs that are the same for more than one alternative.
5. The benefit sacrificed when one alternative is chosen over another is called sunk cost.
6. Short-run decision making only involves short-run decisions that have nothing to do with the firm’s
overall strategy.
7. A sunk cost is always relevant.
8. Future costs that differ across alternatives are relevant costs.
9. Fixed costs are never relevant.
10. Resources that are acquired in advance of usage are flexible resources.
11. Flexible resources may have unused capacity.
12. A choice between internal and external production is a keep-or-drop decision.
13. Typically in a special-order decision, a customer wants to pay more than the usual price.
14. In keep-or-drop decisions, both the segment’s contribution margin and its segment margin are useful in
evaluating the performance of the segment.
15. A segment margin is always greater than or equal to zero.
16. At split-off, the joint costs of production for joint products are not relevant to the
sell-or-process-further decision.
17. In deciding the optimal mix of products that use a constrained resource, it is important to determine the
contribution margin per unit of scarce resource.
18. Linear programming is a special technique that can be used to determine the optimal product mix
when there are multiple constraints.
19. A situation in which management tells divisions that they must reduce costs by 10% is called target
costing.
20. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair’s policy is to
charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.
21. In determining the target price of a good, the company must first determine the target cost and the
desired profit.
22. Demand is one side of the pricing equation; supply is the other side.
23. The markup includes desired profit and any costs not included in the base cost.
24. Many companies start with cost to determine price since revenue must cover cost for the firm to make
a profit.
25. A major advantage of markup pricing is that standard markups are easy to apply.
26. Target costing is a method of determining the cost of a product or service based on the price (target
price) that customers are willing to pay.
27. Target costing involves much more up-front work than cost-based pricing.
28. Target costing can be used most effectively in the design and development stage of the product life
cycle.
MATCHING
Match each statement with the correct item below.
a.
the difference in total cost between the alternatives in a decision
b.
determine whether or not a segment should be kept or dropped
c.
limited resources and limited demand for each product
d.
a specific set of procedures that produces a decision
e.
the point that products that have common processes and costs of production become
distinguishable
f.
method of determining the cost of a product based on the price that customers are willing
to pay
g.
decisions involving a choice between internal and external production
h.
products that have common processes and costs of production up to a point
i.
past costs that cannot be affected by future decisions
j.
a percentage applied to the base cost to cover other costs plus profit
k.
determine whether a specially priced order should be accepted or rejected
l.
determine whether it is more profitable to process a joint product further
1. Decision model
2. Sunk costs
3. Differential cost
4. Joint products
5. Keep–or-drop decisions
6. Make-or-buy decisions
7. Sell-or-process-further decision
8. Special-order decisions
9. Split-off point
10. Constraints
11. Markup
12. Target costing
COMPLETION
1. ____________________ consists of choosing among alternatives with an immediate or limited end in
view.
2. A _________________ can be used to structure the decision maker’s thinking and to organize the
information to make a good decision.
3. The difference between the summed costs of two alternatives in a decision is known as the
__________________.
4. _____________________ are simply those factors that are hard to put a number on, including things
like political pressure and product safety.
5. Most short-run decisions require extensive consideration of ___________.
6. If a future cost is the same for more than one alternative, and it has no effect on the decision is known
as a(n) _____________ cost.
7. In order to be classified as a _________________, a cost must possess two characteristics, that they
are future costs and they differ across alternatives.
8. The benefit sacrificed or foregone when one alternative is chosen over another is known as the
____________________.
9. A cost that cannot be affected by any future action is called a(n) _______________.
10. A manager will make a __________________ when determining if a specially priced order should be
accepted or rejected.
11. Segmented reports are helpful for managers to make _______________ decisions.
12. The decision on whether to produce a product internally or purchase it from a supplier is an example
of a _______________.
13. __________________ have common processes and costs of production up to a split-off point.
14. ______________ is the point at which products become distinguishable after passing through a
common process.
15. _______________________ focuses on whether a product should be processed beyond the split-off
point.
16. Limited resources or a limited demand for a product are examples of ______________.
17. In the presence of multiple constraints the solution is considerably more complex than for one
constraint and requires a technique known as ____________________.
18. ________________ refers to the relative amount of each product manufactured by a company.
19. The percentage that is applied to the base cost is known as the _____________.
20. A method of determining the cost of a product or service based on the price that customers are willing
to pay is called ________________.
MULTIPLE CHOICE
1. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The
defective units were discovered before leaving the plant. Pasha can sell them “as is” for $20 or can
rework them at a cost of $15 and sell them at the regular price of $50. Which of the following is not
relevant to the sell-or-rework decision?
a.
$15 for rework
b.
$20 selling price of defective units
c.
$30 manufacturing cost
d.
$50 regular selling price
e.
All of these are relevant.
2. Which of the following is not a step in the decision-making model?
a.
define the problem
b.
identify alternatives
c.
consider qualitative factors
d.
total relevant costs and benefits for each alternative
e.
determine costs and benefits for both feasible and unfeasible alternatives
3. The act of choosing among alternatives with an immediate or limited end in view is termed
a.
assessing feasible alternative.
b.
strategic decision making.
c.
constructing a decision model.
d.
short-run decision making.
e.
None of these.
4. Future costs that differ across alternatives are
a.
opportunity costs.
b.
sunk costs.
c.
relevant costs.
d.
variable costs.
e.
product costs.
5. Depreciation of equipment is an example of a(n)
a.
relevant cost.
b.
opportunity cost.
c.
sunk cost.
d.
variable cost.
e.
None of these.
6. Resources that can be purchased in the amount needed and at the time of use are
a.
lumpy resources.
b.
flexible resources.
c.
committed resources.
d.
product resources.
e.
implicit resources.
7. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would
be $11.50). The order would require specialized materials costing $4.00 per unit. Direct labor and
variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit.
However, the company has excess capacity and acceptance of the order would not raise total fixed
factory overhead. The warehouse, however, would have to add capacity costing $1,300. Which of the
following is relevant to the special order?
a.
$11.50 normal selling price
b.
$1.20 fixed factory overhead per unit
c.
$7.35 spent on donuts and coffee
d.
$8.90 selling price per unit of special order
e.
None of these.
8. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The
defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can
rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of
reworking the defective units is
a.
$4,500.
b.
$6,750.
c.
$7,500.
d.
$3,000.
e.
$2,250.
9. An important qualitative factor to consider regarding a special order is the
a.
variable costs associated with the special order.
b.
avoidable fixed costs associated with the special order.
c.
effect the sale of special-order units will have on the sale of regularly priced units.
d.
incremental revenue from the special order.
10. Qualitative factors that should be considered when evaluating a make–or-buy decision are
a.
the quality of the outside supplier’s product.
b.
whether the outside supplier can provide the needed quantities.
c.
whether the outside supplier can provide the product when it is needed.
d.
All of these.
11. Abbott Company is considering purchasing a new machine to replace a machine purchased one year
ago that is not achieving the expected results. The following information is available:
Expected maintenance costs of new machine
$ 12,000 per year
Purchase price of existing machine
$150,000
Expected cost savings of new machine
$ 20,000 per year
Expected maintenance costs of existing machine
$ 8,000 per year
Resale value of existing machine
$ 35,000
Which of these items is irrelevant?
a.
Expected maintenance costs of new machine
b.
Purchase cost of existing machine
c.
Expected maintenance costs of existing machine
d.
Expected resale value of existing machine
12. Refer to Figure 13-1. Which costs of the special order relate to flexible resources?
a.
wood and glass
b.
wood, glass, and variable overhead
c.
depreciation on machinery
d.
wood, glass, and direct labor
e.
wood, glass, direct labor, and setup labor
13. Refer to Figure 13-1. Which of the following is a qualitative factor that Fuller would consider in
making the decision to accept or reject the special order?
a.
cost of yarn and backing
b.
cost of setup labor
c.
the no-layoff policy
d.
the use of machinery
e.
the machining and electricity
14. Refer to Figure 13-1. Which of the following is irrelevant to the special order decision?
a.
cost of wood and glass
b.
direct labor cost
c.
machining and electricity cost
d.
$40 price
e.
All of these are relevant.
15. Refer to Figure 13-1. If Fuller accepts the special order, by how much will operating income increase
or decrease?
a.
$14,400 increase
b.
$12,000 decrease
c.
$12,000 increase
d.
$21,600 increase
e.
There will be no effect on operating income.
16. Which of the following costs is not relevant to a decision to sell a product at split-off or process the
product further and then sell the product?
a.
joint costs allocated to the product
b.
the selling price of the product at split-off
c.
the additional processing costs after split-off
d.
the selling price of the product after further processing
17. A decision involving a choice between internal and external production is what kind of decision?
a.
relevant
b.
keep-or-drop
c.
sell-or-process-further
d.
special-order
e.
make-or–buy
18. A decision that focuses on whether a specially priced order should be accepted or rejected is what kind
of decision?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
19. A decision in which a manager needs to determine whether a product line (or segment) should
continue or be eliminated is what kind of decision?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
20. Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged
5,000 sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes at
$14 per box. Costs per box are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
No variable marketing costs would be incurred on the order. The company is operating significantly
below the maximum productive capacity. No fixed costs are avoidable.
Should Piersall accept the order?
a.
Yes, income will increase by $6,000.
b.
Yes, income will increase by $9,000.
c.
No, income will decrease by $3,000.
d.
No, income will decrease by $6,000.
e.
It doesn’t matter; there will be no impact on income.
21. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5.
Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying
unaccompanied. Costs per plane are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
No variable marketing costs would be incurred. The company is operating significantly below the
maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its
own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine
costing $1,500 would be required to affix the decals. After the order is complete, the machine would
be scrapped. Should the special order be accepted?
a.
Yes, income will increase by $300.
b.
No, income will decrease by $180.
c.
No, income will decrease by $1,500.
d.
Yes, income will increase by $180.
e.
It doesn’t matter; there will be no change in income.
Contribution margin [($1.75 − 1.61) 12,000]
Less: cost of special machine
22. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials
Direct labor
Inspecting products
Providing power
Providing supervision
Setting up equipment
Moving materials
Total
If the component is not produced by Foster, inspection of products and provision of power costs will
only be 10% of the current production costs; moving materials costs and setting up equipment costs
will only be 50% of the production costs; and supervision costs will amount to only 40% of the
production amount. An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
a.
$25,000 increase
b.
$45,000 increase
c.
$90,000 decrease
d.
$90,000 increase
Make:
Direct materials
Direct labor
Inspecting products (avoid 90%)
Providing power (avoid 90%)
Providing supervision (avoid 60%)
Setting up equipment (avoid 50%)
Moving materials (avoid 50%)
Total
Buy:
Purchase price (20,000 $25.50)
23. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if
the component is purchased from an outside supplier.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
a.
$270,000 decrease
b.
$270,000 increase
c.
$30,000 decrease
d.
$30,000 increase
Make:
Direct materials
Direct labor
Variable overhead
Total
Buy:
Purchase price (40,000 $12.75)
24. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same if
the component is purchased from an outside supplier.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component
from the outside supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
a.
$225,000 decrease
b.
$195,000 increase
c.
$165,000 decrease
d.
$135,000 increase
25. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit:
Fixed costs per month:
Direct materials
Factory overhead
Direct labor
Selling and admin.
Factory overhead
Total
Distribution
Total
The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00
per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for
$18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
a.
decrease of $8,000
b.
increase of $9,000
c.
increase of $8,000
d.
decrease of $6,000
$(240,000)
$(465,000)