Relevant Costing
(Study Notes)
1.0 Definition and Classification of Cost
1.1 Differential Costs
1.1.1 Those costs that differs between alternative
1.1.2 Not a sunk costs
1.2 Incremental Costs
1.2.1 Costs that will increase if a particular alternative is
chosen.
1.2.2 A cost associated with producing an additional unit
1.2.3 It must be compared with the incremental revenue
1.3 Avoidable costs
1.3.1 Those that can be eliminated (in whole or in part) by
choosing one alternative over another in a decision
1.4 Sunk Costs
1.4.1 Costs that has already been incurred and that
cannot be changed by any decision made now or in
the future, are never relevant
1.5 Committed Costs
1.5.1 Present and future costs that will not change
regardless of the decision made.
1.6 Opportunity costs
1.6.1 Not recorded in the general ledger.
1.6.2 Factors in the decision-making process because they
differ among alternatives.
2.0 Relevant and Irrelevant Items
2.1 Relevant
2.1.1 Any expected future costs which will differ among
given alternative courses of actions.
2.1.2 Differential, Avoidable, and Opportunity Costs
2.2 Irrelevant
2.2.1 Unavoidable fixed cost is an ongoing fixed cost
which cannot be altered or affected by a particular
decision.
2.2.2 All sunk and committed costs
2.2.3 Future revenues and costs that will not change by
choosing one alternative over another in a decision
are never relevant
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3.2.2
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xx
xx
xx
(xx)
Xx
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8.1.2
Shutdown
Shutdown Cost
xx
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Variable Cost
Contribution Margin
Avoidable Fixed Costs
(xx)
xx
(xx
)
xx
Total
Total
xx
Sunk Costs
a. Are substituted for opportunity costs
b. Are relevant to long-term decisions but not to short-term decisions
c. Are relevant to decision making
d. In and themselves are not relevant to decision making
2.
3.
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5.
6.
An opportunity cost is
a. The difference between in total costs which results from selecting
one choice instead of another
b. The profit foregone by selecting one choice 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.
7.
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8.
9.
10. In a sell or process further decision, which costs below is (are) not
relevant in a decision regarding whether the product should be
processed further?
a. A variable production cost incurred prior to split-off
b. A variable production cost incurred after split-off
c. An avoidable fixed production cost incurred after split-off
d. Both B and C
11. A factory is operating at less than 100% capacity. Potential additional
business will not use up the remainder of the plant capacity. Given
the following list of costs, which one should be ignored in a decision
to produce additional units of product?
a. Variable selling expenses
b. Fixed factory overhead
c.Direct labor
d. Contribution margin of additional units
12. In a make-or-buy decision, relevant costs include:
a. unavoidable fixed costs
b. avoidable fixed costs
c.fixed factory overhead costs applied to products
d. fixed selling and administrative expenses
13. In situations where management must decide between accepting or
rejecting a onetime- only special order where there is sufficient idle
capacity to fill the order, which one of the following is NOT relevant in
making the decision?
a. absorption costing unit product costs
b. variable costs
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c.incremental costs
d. differential costs
14. Total unit costs are
a. Relevant for cost-volume-profit analysis
b. Irrelevant in marginal analysis
c.Independent of the cost system used to generate them
d. Needed for determining the product contribution.
15. Which of the following is most relevant to a manufacturing equipment
replacement decision?
a. Original cost of the old equipment
b. Disposal price of the old equipment
c.Gain or loss on the disposal of the old equipment
d. A lump-sum write-off amount from the disposal of the old
equipment.
16. A companys approach to an outsourcing decision
a. Depends on whether the company is operating at or below normal
volume
b. Involves an analysis of avoidable costs
c. Should use absorption costing
d. Should use activity-based costing
17. Cavite Corporation contemplates the temporary shutdown of its plant
facilities in a provincial area which is economically depressed due to
natural disasters. Below are certain manufacturing and selling
expense:
1. Depreciation
2. Property tax
3.
Interest expense
4. Insurance of Facilities
5. Sales Commissions
6.
Delivery Expense
7. Security of Premises
Which of the above expenses will continue during the shutdown
period?
a. All expenses in the list
c. Items 1,2,and 3 only
b. All except items 5 and 6
d. Items 1,2,3,4, 6,
and 7 only
18. A special order generally should be accepted if:
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26.
27.
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28.
29.
30.
Pixie Co. produces Component 6417 for use in one of its electronic
gadgets. Normal annual production for the item is 100,000 units.
The cost per 100 unit lot of the part are as follows:
Direct Materials
P 520
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Direct Labor
Manufacturing Overhead
Variable
Fixed
Total Manufacturing Costs per 100 units
200
240
320
P 1,280
Bobbie Inc. offered to sell Pixie all 100,000 unit it will need during
the coming year for P 1,200 per 100 units. If Pixie accepts the offer
from bobbie, the facilities used to manufacture Component 6417
could be used in the production of Component 8275. This change
would save Pixie P 180,000 in relevant costs. In addition, a P
200,000 cost item included in fixed overhead is specifically related
to Part 6417 and would be eliminated. Pixie should
a. Buy component 6417 because of P 300,000 savings
b. Buy component 6417 because of P 140,000 savings
c. Continue producing component 6417 because of P
40,000 savings
d. Continue producing component 6417 because of P 60,000
savings
31.
32.
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34.
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36.
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37.
38.
Nore Milling Co. has a plant capacity of 40,000 units per month.
Unit costs at capacity are:
Direct Materials
P 100
Direct Labor
150
Variable Overhead
75
Fixed overhead
75
Marketing Fixed Costs
175
Marketing Variable Costs
90
Present monthly sales are 39,000 units at P630 each. Josh
Corporation contacted Nore about purchasing 40,000 units at P600
each. The present sales would not be affected by the special order.
Nore should:
a. Accept the special order due to P 185,000 incremental
income
b. Accept the special order due to P 110,000 incremental income
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39.
40.
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41.
42.
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c.
d.
43.
KXM Bottling Corporation makes and sells two soft drinks. COLA
and ORANGE. The comparative data for the two shows:
COLA
ORANGE
Selling price per bottle
P 9.50
P 9.80
Variable Costs
6.50
7.20
Production Capacity per hour
250
300
bottles
bottles
There are 500 available production hours per month. Based on the
above information:
a. ORANGE and COLAs unit contribution margin is the same
hence it is equally profitable to produce either.
b. It is more profitable to produce ORANGE
c. COLAs contribution margin is higher than that of ORANGE
hence more profitable to produce.
d. It is more profitable to produce COLA
44.
45.
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47.
Scully, Inc. has been manufacturing 5,000 units of Part 20561 that
is used in the manufacture of one of its products. At this level of
production, the cost per unit of manufacturing part 20561 is as
follows:
Direct Materials
P2
Direct Labor
8
Variable Overhead
4
Fixed Overhead
6
TOTAL
P 20
Muller Company has offered to sell Scully 5,000 units of Part 25061
for P19 a unit. Scully has determined that it could use the facilities
presently used to manufacture Part 25061 to manufacture product
X and generate an operating profit of P 4,000. Scully has also
determined that two-thirds of the fixed overhead applied will
continue even if Part 25061 is purchased from Muller. To determine
whether to accept Mullers offer, the net relevant manufacturing
costs to Scully are:
a. P 70,000
b. P 80,000 c. P 90,000
d. P 95,000
48.
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Direct Labor
Variable Overhead
Fixed Overhead
12
5
7
Hollow Company has offered to sell Buck 5,000 units of Part 1700
for P27 per unit. If Buck accepts the offer, some of the facilities
presently used to manufacture part 1700 could be used to help
with the manufacture of Part no. 1211, and P3 per unit of the fixed
overhead applied to part no. 1700 would be totally eliminated. By
what amount would net relevant costs be increased or decreased if
Buck accepts Hollows offer?
a. P 35,000 decrease
c. P 20,000 decrease
b. P 15,000 decrease
d. P 5,000 increase
49.
50.
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Sales
Variable Costs
Contribution
Margin
Fixed Costs
Operating
Income/(loss)
P 200,000
P 65,000
140,000
60,000
58,000
7,000
P
765,000
523,000
242,000
75,000
100,000
35,000
25,000
22,000
(15,000)
132,000
110,000
51.
Assume none of the fixed expenses for the hard rubber line are
avoidable. What will be total net income if the line is dropped?
a. $125,000
b. $103,000 c. $105,000 d. $140,000
52.
Assume all of the fixed expenses for the hard rubber line are
avoidable. What will be total net income if that line is dropped?
a. $125,000
b. $103,000 c. $105,000 d. $140,000
53.
54.
If the total net income after dropping the hard rubber line is
P105,000, hard rubbers avoidable fixed expenses were
a. P20,000
b. P2,000. c. P7,000
d.
P5,000
55.
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56.
57.
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P10
P125,000
Current business segment operations for Whitman, a mass retailer, are presented
below.
Merchandise Automotive Restaurant
Total
Sales
P500,000
P400,000
P100,000
P1,000,000
Variable costs
300,000
200,000
70,000
570,000
Fixed costs
100,000
100,000
50,000
250,000
Operating
income (loss) P100,000 P100,000
P(20,000)
P
180,000
Management is contemplating the discontinuance of the
Restaurant segment since it is losing money. If this segment is
discontinued, P30,000 of its fixed costs will be eliminated. In
addition, Merchandise and Automotive sales will decrease 5% from
their current levels. What will Whitmans total contribution margin
be if the Restaurant segment is discontinued?
a. P160,000
b. P220,000 c. P367,650 d. P380,000
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59.
60.
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Oak
Cherry
P85,000
P100,000
72,000
13,000
14,000
P(1,000)
P 7,800
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66.
67.
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