RELEVANT COSTING

1. The term relevant cost applies to all of the following decision situations except the
A. Acceptance of special product order.
B. Manufacture or purchase of a component part.
C. Determination of product price.
D. Replacement of equipment.

2. A fixed cost is relevant if it is

A. a future cost. B. avoidable. C. sunk. D. a product cost.

3. The type of cost vital to decision making but not recorded in the accounting records
a. Sunk costs b. Opportunity costs c. Direct costs d. Out of pocket costs

4. In analyzing whether to build another regional service office, the salary of the Chief Executive Officer (CEO) at
the corporate headquarters is
a. Relevant because salaries are always relevant.
b. Relevant because this will probably change if the regional service office is build.
c. Irrelevant because it is future cost that will not differ between the alternatives under consideration.
d. Irrelevant since another imputed costs for the same will be considered.

5. All of the following are examples of imputed costs except

A. The stated interest paid on a bank loan.
B. The use of the firm's internal cash funds to purchase assets.
C. Assets that are considered obsolete that maintain a net book value.
D. Decelerated depreciation.

6. Total unit costs are

a. Relevant for cost-volume-profit analysis.
b. Needed for determining product contribution.
c. Irrelevant in marginal analysis.
d. Independent of the cost system used to generate them.
7. Sunk costs
a. Are substitute for opportunity costs.
b. In and of themselves are not relevant to decision making.
c. Are relevant to decision making.
d. Are fixed costs.

8. The manner of determining whether favorable results of an alternative are sufficient to justify the cost of taking
that alternative
a. Cost behavior analysis c. Cost control analysis
b. Cost benefit analysis d. Cost center analysis
9. Fixed costs are ignored in allocating scarce resources because
a. they are sunk.
b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
d. fixed costs only apply to long-run decisions.

10. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

11. Which of the following costs are relevant to a make-or-buy decision?

a. original cost of the production equipment
b. annual depreciation of the equipment
c. the amount that would be received if the production equipment were sold
d. the cost of direct materials purchased last month and used to manufacture the component

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12. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in some of its
products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier’s per-unit variable cost to make the part.
d. The number of units of the part needed each period.

13. If a firm is at full capacity, the minimum special order price must cover
a. variable costs associated with the special order
b. variable and fixed manufacturing costs associated with the special order
c. variable and incremental fixed costs associated with the special order
d. variable costs and incremental fixed costs associated with the special order plus foregone contribution
margin on regular units not produced
e. both c and d.

14. Pinoy Company temporarily has excess production capacity, the idle plant facilities can be used to manufacture
a low-margin item. The low-margin item should be produced if it can be sold for more than its
a. Variable costs plus opportunity cost of idle facilities.
b. Indirect costs plus any opportunity cost of idle facilities.
c. Fixed costs.
d. Variable costs.

15. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin. c. product line operating income.
b. product line segment margin. d. corporate net income.

16. There is a market for both product X and product Y. Which of the following costs and revenues would be most
relevant in deciding whether to sell product X or process it further to make product Y?
A. Total cost of making X and the revenue from sale of X and Y.
B. Total cost of making Y and the revenue from sale of Y.
C. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
D. Additional cost of making X, given the cost of making Y, and additional revenue from Y.

17. A product should be dropped if

a. It has negative incremental profit.
b. It has a negative contribution margin.
c. Dropping it will increase the total profit of the company.
d. It is not essential to the company’s product line.

18. In equipment-replacement decisions, which one of the following does not affect the decision-making process?
a. Current disposal price of the old equipment.
b. Operating costs of the old equipment.
c. Original fair market value of the old equipment.
d. Cost of the new equipment.

19. Bolsa Co. estimates that 60,000 special zipper will be used in the manufacture of industrial bags during the next
year. Sure Zipper Co. has quoted a price of P6 per zipper. Bolsa would prefer to purchase 5,000 units per
month but Sure is unable to guarantee this delivery schedule. In order to ensure the availability of these zippers,
Bolsa is considering the purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can
invest cash at 12%, the company’s opportunity cost of purchasing the 60,000 units are the beginning of the year
is
a. P21,600 b. P43,200 c. P19,800 d. P39,600

20. Listed below are a company’s monthly unit costs to manufacture and market a particular product.
Unit Costs Variable Cost Fixed Costs
Direct materials $2.00
Direct labor 2.40
Indirect Manufacturing 1.60 $1.00
Marketing 2.50 1.50
The company must decide to continue making the product or buy it from an outside supplier. The supplier has
offered to make the product at the same level of quality that the company can make it. Fixed marketing costs
would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the

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 proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing its
operating income?
a. $8.50 b. $6.75 c. $7.75 d. $5.25

21. Savage Industries is a multi-product company that currently manufactures 30,000 units of Part QS42 each
month for use in production. The facilities now being used to produce Part QS42 have fixed monthly cost of
P150,000 and a capacity to produce 84,000 units per month. If Savage were to buy Part QS42 from an outside
supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The
variable production costs of Part QS42 are P11 per unit.

If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price of P12.875, the
monthly usage at which it will be indifferent between purchasing and making Part QS42 is
A. 30,000 units. B. 32,000 units. C. 80,000 D. 48,000

22. Part BX is a component that Motors and Engines Co. uses in the assembly of motors. The cost to produce one
BX is presented below:
Direct materials P 4,000
Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct labor) 48,000
Total manufacturing costs P84,800

Materials handling which is not included in manufacturing overhead, represents the direct variable costs of the
receiving department that are applied to direct materials and purchased components on the basis of their cost.

The company’s annual overhead budget is one-third variable and two-thirds fixed. Pre-casts Co., offers to
supply BX at a unit price of P60,000. Should the company buy or manufacture?
a. Buy, due to advantage of P24,800 per product.
b. Manufacture, due to advantage of P7,200 per unit.
c. Buy, due to advantage of P12,800 per unit.
d. Manufacture, due to advantage of P19,200 per unit.

23. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are $0.40 and avoidable
fixed costs are $400. A discount store has offered $0.80 per unit for 400 units of product M. The managers
believe that if they accept the special order, they will lose some sales at the regular price. Determine the
number of units they could lose before the order become unprofitable.
a. 267 units. b. 500 units. c. 600 units. d. 750 units

24. 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 unit lot of the part are as follows:
Direct material P520
Direct labor 200
Manufacturing overhead
Variable 240
Fixed 320
Total manufacturing costs per 100 units P1,280
Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for P1,200 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 P180,000 in relevant costs. In addition, a
P200,000 cost item included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pixie
should
a. Buy Component 6417 because of P300,000 savings.
b. Buy Component 6417 because of P140,000 savings.
c. Continue producing Component 6417 because of P40,000 savings.
d. Continue producing Component 6417 because of P60,000 savings.

25. ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this order will not affect
the regular sales of 80,000 units. The cost to manufacture one unit of this particular product is:
Variable costs (per unit) Fixed costs (per year)
Direct materials $1.50
Direct labor 2.50
Overhead 0.80 $100,000

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 Selling and administrative 3.00 50,000
Variable selling costs for each of these 5,000 units will be $1.00. What is the differential cost to ABC Company of
accepting this special order?
A. $39,000 B. $34,000 C. $30,250 D. $29,000

26. Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the
following applied manufacturing overhead costs: fixed costs - $21,000, and variable costs - $33,000.
The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be
done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be
included in the calculation to determine the minimum acceptable price for the job?
a. $36,700 b. $40,750 c. $54,000 d. $58,050

27. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge. Arnel has a stall which
specializes in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are P15,000 and variable costs
are P30 per basket. An average of 750 baskets are sold each day. Arnel has a capacity of 800 baskets per day.
By closing time, yesterday, a bus load of teachers who attended a seminar at the Development Academy of the
Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P1,500 for 40 baskets. Arnel should have
a. Rejected the offer since he could have lost P500.
b. Rejected the offer since he could have lost P900.
c. Accepted the offer since he could have P300 contribution margin.
d. Accepted the offer since he could have P700 contribution margin.

28. Sta. Elena Company manufactures men’s caps. The projected income statement for the year before any special
order is as follows:
Amount Per Unit
Sales P 400,000 P 20
Cost of goods sold 320,000 16
Gross margin P 80,000 P 4
Selling expenses 30,000 3
Operating income P 50,000 P 1

Fixed costs included in above projected income statement are P80,000 in cost of goods sold and P9,000 in
selling expenses. A special order offering to buy 2,000 caps for P17 each was made to Sta. Elena. No additional
selling expenses will be incurred if the special order is accepted. Sta. Elena has the capacity to manufacture
2,000 more caps.
As a result of the special order, the operating income would increase by
a. P34,000 b. P24,000 c. P10,000 d. P0

29. Division A of Decision Experts Corporation is being evaluated for elimination. It has contribution to overhead of
P400,000. It receives an allocated overhead of P1 million, 10% of which cannot be eliminated. The elimination
of Division A would affect pre-tax income by
a. P400,000 decrease. c. P500,000 decrease.
b. P400,000 increase. d. P500,000 increase.

30. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its existing
equipments. The new equipment would cost P900,000 and has a five-year useful life, with a zero terminal
disposal price. Variable operating costs would be P1 million per year. The present equipment has a book value
of P500,000 and a remaining life of five years. Its disposal price now is P50,000 but would be zero after five
years. Variable operating costs would be P1,250,000 per year. Considering the five years in total, but ignoring
the time value of money and income taxes. Ysabelle should
a. Replace due to P400,000 advantage.
b. Not replace due to P150,000 disadvantage.
c. Replace due to P350,000 advantage.
d. Not replace due to P100,000 disadvantage.

31. Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating cost of P1,850,000 (all cash
items except depreciation of P350,000). The company is considering the purchase of a new machine costing
P1,200,000 per year. The new machine would increase (1) revenues to P2,900,000; (2) operating cost to
P2,050,000; and (3) depreciation to P500,000 per year. Assuming a 35% income tax rate, Arlene’s annual
incremental after-tax cash flows from the machine would be

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 a. P330,000 b. P345,000 c. P292,500 d. P300,000

32. A manufacturing company's primary goals include product quality and customer satisfaction. The company sells
a product, for which the market demand is strong, for $50 per unit. Due to the capacity constraints in the
Production Department, only 300,000 units can be produced per year. The current defective rate is 12% (i.e., of
the 300,000 units produced, only 264,000 units are sold and 36,000 units are scrapped). There is no revenue
recovery when defective units are scrapped. The full manufacturing cost of a unit is $29.50, including
Direct materials $17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the defective rate can be reduced to 2% by using a different direct
material. However, this will increase the direct materials cost by $2.50 per unit to $20 per unit. The net benefit of
using the new material to manufacture the product will be
A. $(120,000) B. $120,000 C. $750,000 D. $1,425,000

33. A company produces and sells three products:

Products
C J P
Sales $200,000 $150,000 $125,000
Separable (product) fixed costs 60,000 35,000 40,000
Allocated fixed costs 35,000 40,000 25,000
Variable costs 95,000 75,000 50,000
The company lost its lease and must move to a smaller facility. As a result, total allocated fixed costs will be
reduced by 40%. However, one of its products must be discontinued in order for the company to fit in the new
facility. Because the company's objective is to maximize profits, what is its expected net profit after the
appropriate product has been discontinued?
A. $10,000 B. $15,000 C. $20,000 D. $25,000