Deck 13: Short-Run Decision Making: Relevant Costing

Question 1

Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy.

Answer 1

False

Question 2

Fixed costs are never relevant.

Answer 2

False

Question 3

A sunk cost is always relevant.

Answer 3

False

Question 4

In short-run decision making, the alternative with the lowest overall cost is always chosen.

Question 5

Future costs that differ across alternatives are relevant costs.

Question 6

Flexible resources may have unused capacity.

Question 7

Resources that are acquired in advance of usage are flexible resources.

Question 8

Typically in a special-order decision, a customer wants to pay more than the usual price.

Question 9

Linear programming is a special technique that can be used to determine the optimal product mix when there are multiple constraints.

Question 10

A choice between internal and external production is a keep-or-drop decision.

Question 11

In making a short-run decision, all alternatives need to be considered.

Question 12

The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.

Question 13

The benefit sacrificed when one alternative is chosen over another is called sunk cost.

Question 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.

Question 15

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.

Question 16

Irrelevant costs are costs that are the same for more than one alternative.

Question 17

A segment margin is always greater than or equal to zero.

Question 18

At split-off, the joint costs of production for joint products are not relevant to the sell-or-process-further decision.

Question 19

A situation in which management tells divisions that they must reduce costs by 10% is called target costing.

Question 20

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.

Question 21

Demand is one side of the pricing equation; supply is the other side.

Question 22

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
Sell-or-process-further decision

Question 23

A major advantage of markup pricing is that standard markups are easy to apply.

Question 24

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.

Question 25

In determining the target price of a good, the company must first determine the target cost and the desired profit.

Question 26

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
Target costing

Question 27

Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.

Question 28

Target costing involves much more up-front work than cost-based pricing.

Question 29

The markup includes desired profit and any costs not included in the base cost.

Question 30

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
Keep-or-drop decisions

Question 31

Target costing can be used most effectively in the design and development stage of the product life cycle.

Question 32

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
Split-off point

Question 33

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
Joint products

Question 34

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
Sunk costs

Question 35

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
Differential cost

Question 36

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
Make-or-buy decisions

Question 37

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
Constraints

Question 38

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
Special-order decisions

Question 39

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
Markup

Question 40

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
Decision model

Question 41

A manager will make a __________________ when determining if a specially priced order should be accepted or rejected.

Question 42

Most short-run decisions require extensive consideration of ___________.

Question 43

Segmented reports are helpful for managers to make _______________ decisions.

Question 44

The percentage that is applied to the base cost is known as the _____________.

Question 45

The difference between the summed costs of two alternatives in a decision is known as the __________________.

Question 46

Limited resources or a limited demand for a product are examples of ______________.

Question 47

____________________ consists of choosing among alternatives with an immediate or limited end in view.

Question 48

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.

Question 49

__________________ have common processes and costs of production up to a split-off point.

Question 50

______________ is the point at which products become distinguishable after passing through a common process.

Question 51

A cost that cannot be affected by any future action is called a(n) _______________.

Question 52

The decision on whether to produce a product internally or purchase it from a supplier is an example of a _______________.

Question 53

The benefit sacrificed or foregone when one alternative is chosen over another is known as the ____________________.

Question 54

In the presence of multiple constraints the solution is considerably more complex than for one constraint and requires a technique known as ____________________.

Question 55

In order to be classified as a _________________, a cost must possess two characteristics, that they are future costs and they differ across alternatives.

Question 56

A _________________ can be used to structure the decision maker's thinking and to organize the information to make a good decision.

Question 57

A method of determining the cost of a product or service based on the price that customers are willing to pay is called ________________.

Question 58

_____________________ are simply those factors that are hard to put a number on, including things like political pressure and product safety.

Question 59

________________ refers to the relative amount of each product manufactured by a company.

Question 60

_______________________ focuses on whether a product should be processed beyond the split-off point.

Question 61

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

Question 62

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.

Question 63

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

Question 64

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

Question 65

Figure 13-1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible.
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.

Question 66

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.

Question 67

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.

Question 68

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: 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.

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

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: 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

Question 74

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

Question 75

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.

Question 76

Figure 13-1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible.
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.

Question 77

Figure 13-1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible.
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

Question 78

Future costs that differ across alternatives are

A) opportunity costs.
B) sunk costs.
C) relevant costs.
D) variable costs.
E) product costs.

Question 79

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

Question 80

Figure 13-1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible.
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