H106

MANAGEMENT ACCOUNTING
RELEVANT COSTING

Decision Making – the process of identifying, evaluating and choosing from at least two alternative
courses of action. For business, management must choose in favor of the option most beneficial to
the company in order to achieve company objectives.

Decision making process

1. Define the problem
2. Specify the objective and criteria
3. Identifying the alternative courses of action
4. Determining and evaluating the possible consequences of the alternatives
5. Choosing the best alternative and making the decision
6. Evaluating the results of the decision

Role of the management accountant

• Decision making is a function of management.
• Management accountant’s role is dealing on the quantitative aspects of the decision

Factors considered
1. Qualitative factors – those that cannot easily and accurately be expressed in terms of money
or any other numerical unit of measure.
2. Quantitative factors – those that can easily be expressed in terms of money or other numerical
unit of measure.

What makes information useful?

• Relevance
• Accuracy
• Timeliness

What makes information (esp. costs) relevant?

• It will be earned (for income) or incurred (for costs) in the future
• Differ among alternatives

Some short-term decisions

1. Accept or reject a special order
2. Make or buy a component
3. Keep or drop a division/product line
4. Sell or process further
5. Prioritizing constrained resources

Types of costs and terminologies used in decision making

1. Relevant costs – future costs that are expected to be different among alternatives; it is
oftentimes used interchangeably with terms like ‘differential costs’ and ‘avoidable costs’
2. Differential costs – increases or decreases in total costs that result from selecting one
alternative instead of the other
3. Avoidable costs – costs that will be saved or those that will not be incurred if a certain decision
is made.
4. Sunk costs – costs that are already incurred and cannot be avoided regardless of what
decision is made.
5. Out-of-pocket costs – costs that will require expenditure of cash or incurrence of liabilities as a
consequence of a management decision.
6. Opportunity costs – income sacrificed or foregone when a certain alternative is chosen over
another alternative.
7. Joint costs – costs incurred in simultaneously manufacturing two or more products that are
difficult to identify individually as separate types of products until the products reach a
certain processing stage knows as the ‘split-off point’
8. Split-off point – a point in the manufacturing process where some or all of joint products can
be recognized as distinct and separate products.

1|Page
 9. Further processing costs – costs incurred beyond the split-off point as separated joint products
are to be processed further.
10. Bottleneck resources – any resource or operation where the capacity is less than the demand
placed upon it.

Approaches in solving problems that involve decision-making

1. Total approach – the total revenues and costs are determined for each alternative, and the
results are compared to serve as a basis for making decisions.
2. Differential approach – only the differences or changes in costs and revenues are considered.

ACCEPT OR REJECT A SPECIAL ORDER

One-time order. In many instances, the buyer requests that the sales price be reduced.

What costs to look for?

1. Incremental costs
2. Opportunity costs

Decision problem: In this case, the selling price is usually lower than the regular selling price because
of the special order. Is the order worth accepting? Are regular sales affected?

Decision guidelines: Accept the order when the additional revenue from the special order exceeds
additional cost, provided the regular market will not be affected. In most cases, fixed costs are
irrelevant. Opportunity cost is considered in case there are regular sales sacrificed in order to meet
the special order.

EXAMPLE. FOUNDER Corporation sells brandies in 800 mL bottes. In a typical year, 20 000 bottles are
sold though it can produce a maximum of 22,000 bottles. For the 20 000-bottle normal capacity, the
following cost data were collected:

Total Per unit

Variable manufacturing costs P700,000 P35
Variable selling costs 300,000 15
Fixed manufacturing costs 3,000,000 150
Fixed selling costs 2,000,000 100

FOUNDER’s brandy sells for P500 per bottle.

MEATFRY Inc. makes a special order for 2,000 bottles this year and requests FOUNDER to reduce the
sales price to P200 only. MEATFRY will not purchase the bottles partially (2,000 bottles or nothing).

a. In a typical year, should FOUNDER accept the special order? What is the minimum price for
this special order?

b. If regular sales are forecasted to be 22 000 this year, should FOUNDER accept the special
order? What is the minimum price for this special order?

c. If regular sales are forecasted to be 20 500 this year, should FOUNDER accept the special
order? What is the minimum price for this special order?

2|Page
Problem 1. ABC CO. has been approached by a foreigner who wants to place a special order for
15,000 units of its product ATB at P22.50 per unit. ABC CO. currently sell this item for P39 per unit, and
the item has a cost of P29 per unit. Further analysis reveals that ABC CO. will not be paying sales
commission of P2.50 a unit on the sales and its packaging requirement will save an additional P1.50
per unit. However, an additional graphics required on this job will cost ABC CO. P30 000. Note also
that fixed costs amounting to P400,000 for the production of 50,000 units will not change. ABC CO.
decided to accept the order but another customer who buys an average of 2,000 units for the
period wants to pay P22.50 only rather than the regular selling price of P39.00

1. Accepting the special order will increase (decrease) profits by how much?
a. 18,500
b. 20,000
c. 19,500
d. 17,000

Problem 2. ELAINE Enterprise has the capacity to produce 10,000 GTAs but operates at 90% of
capacity. GTAs normally sell for P60 each, and cost an average of P50 to make, including a share of
the monthly fixed cost of P180 000. A potential buyer has offered to buy 1 000 GTAs at P40 each.

2. What is the relevant cost per unit?

a. 30
b. 50
c. 40
d. 60

Problem 3. PATRICK Corporation sells a product for P20 with variable cost of P8 per unit. PATRICK
could accept a special order for 1,000 units at P14.

3. If PATRICK accepted the order, how many units could it lose at the regular price before the
decision become unwise?
a. 500
b. 400
c. 300
d. Some other number

Problem 4. CABRERA Inc. produces high quality BALLPENS. Unit production costs based on production
capacity of 100 000 units per year follow:

Direct materials P 50
Direct labor 20
Overhead (20% variable) 10

Sales price 100

Selling and admin cost (40% variable) 15

4. If current operating capacity is at 70 000 BALLPENS a year, what is the minimum price that
the division would consider on a special order of 1 000 BALLPENS to be distributed through
normal channels?
a. 100
b. 80
c. 95
d. 78

3|Page
 5. If current operations utilize the entire capacity, what is the minimum selling price that the
division would consider on a special order of 1 000 BALLPENS on which no variable period
costs would be incurred?
a. 72
b. 94
c. 80
d. 78

Problem 5. ALI Co. has considerable excess manufacturing capacity. A special job order’s cost sheet
includes the following applied manufacturing overhead costs:

Variable costs P 56 250

Fixed costs 45 000

The fixed costs include a normal P6 800 allocation for in-house design costs, although no in-house
design will be done. Instead, the special job will require the use of external designers costing P13 750

6. What is the minimum acceptable price for the job?

a. 63,200
b. 70,000
c. 56,250
d. Some other amount

MAKE OR BUY
Also known as outsource or produce in-house

Decision problem: Should a part or product be manufactured or bought from an outside supplier?

Decision guidelines: Choose the option that involves the lower cost. In most cases, fixed costs are
irrelevant. Consider opportunity costs, if any.

What costs to look for?

1. Avoidable costs
2. Opportunity costs

EXAMPLE. MEATFRY Inc. is currently producing its own brandy and packages them in 800 mL bottles.
Cost of production data under the normal capacity of 10 000 bottles per year is shown in the
following schedule:

Total Per unit

Variable costs P350,000 P35
Fixed costs 1,500,000 150

FOUNDER Corporation offers to supply MEATFRY’s need for brandy at a price of P95 / bottle.

a. Should MEATFRY buy or make its own brandy? What is the maximum price in which MEATFRY
would be better off in buying than making?

b. Assuming that upon halting the production, P800 000 of the fixed costs will no longer be
incurred, should MEATFRY buy or make its own brandy? What is the maximum price in which
MEATFRY would be better off in buying than making?

c. Assuming that the facilities freed up upon halting production will be rented out for an annual
fee of P600 000, should MEATFRY buy or make its own brandy? What is the maximum price
in which MEATFRY would be better off in buying than making?

4|Page
Problem 6. CAROL Corp produces 1 000 units of part XY708 per month. The total manufacturing costs
of the part are as follows:

Direct materials P10,000

Direct labor 5,000
Variable overhead 5,000
Fixed overhead 30,000
Total manufacturing cost P50,000

An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed
overhead being assigned to part XY708 will no longer be incurred if the company purchases the part
from the outside supplier.

7. If CAROL Corp purchases 1 000 units of part XY708 from the outside supplier, its monthly
operating income will decrease/increase by:
a. 4,000 increase
b. 3,200 increase
c. 4,800 decrease
d. 4,000 decrease

Problem 7. JANIKA Inc. is a multi-product company that currently manufactures 30 000 units of part
JAVA each month for use in the production of its main product. The facilities now being used to
produce JAVA have fixed monthly cost of P150 000 and a capacity to produce 84 000 units per
month. If LAMIKA were to buy JAVA from an outside supplier, the facilities would be idle, but 60% of its
fixed costs would not continue. The variable production costs of part JAVA are P11 per unit.

8. If JANIKA can obtain part JAVA 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 JAVA is?
a. 42,000
b. 48,000
c. 46,000
d. 54,000

5|Page
Problem 8. CONTACTO Co. can make 1 000 units of a necessary component with the following costs:

Direct materials P64,000

Direct labor 16,000
Variable overhead 8,000
Fixed overhead ?

The company can purchase the 1 000 units externally for P104 000. The unavoidable fixed costs are
P6 000 if the units are purchased externally. An analysis shows that at this external price, the company
is indifferent between making or buying the part.

9. What are the fixed overhead costs of making the component?

a. 28,000
b. 22,000
c. 23,000
d. 25,000

10. If cost minimization is the major consideration and the company would prefer to buy the
components, what is the maximum external price that CONTACTO would accept to
acquire the 1 000 units externally?
a. 104,000
b. 100,000
c. 102,000
d. 96,000

Problem 9. The following are CALVIN’s monthly unit costs to manufacture and market a particular
product:
Manufacturing Costs:
Direct materials P 2.00
Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00

Marketing Costs:
Variable 2.50
Fixed 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 a level of quality that the company prescribes. Fixed
marketing costs would be unaffected, but variable marketing costs would continue at 30% if the
company were to accept the proposal.

11. What is the maximum amount per unit that the company can pay the supplier without
decreasing its operating income?
a. 6.75
b. 9.25
c. 7.75
d. 7.50

6|Page
PRIORITIZING THE USE OF CONSTRAINED RESOURCES

Decision problem: Which product/s should be produced and sold when there are limited resources or
bottleneck operations?

Decision guidelines: Identify and measure the constraint on the limited resources. Rank the products
according to the highest contribution margin per unit of limited resource.

What to look for?

• Additional profits per use of constrained resources.

EXAMPLE. ABC Inc. produces three products with the following costs and selling prices:

Alpha Beta Charlie

Selling price per unit P16 P21 P21
Variable costs per unit 7 11 13

Direct labor hours per unit 1.00 1.50 2.00

Machine hours per unit 4.50 2.00 2.50

a. In what order should the three products be produces if neither the direct labor hours nor the
machine hours are the company’s production constraint?

b. In what order should the three products be produces if the direct labor hours are the
company’s production constraint?

c. In what order should the three products be produces if the machine hours are the company’s
production constraint?

Problem 10. DOREMI Inc. manufactures electric carpentry tools. The production department had met
all production requirements for the current month and has an opportunity to produce additional units
of product with its excess capacity. Unit selling prices and unit costs for three different drill models are
as follows:

DO RE MI
Selling price P 58 P 65 P 80

Costs:
Direct material 16 20 19
Direct labor (P10 per hour) 10 15 20
Variable overhead --8 12 16
Fixed overhead 15 10 20

Variable overhead is applied on the basis of direct labor pesos, while fixed overhead is applied on
the basis of machine hours (P5 per hours). There is sufficient demand for the additional production of
any model in the product line.

12. If there is excess capacity, and no limitation in resources, to which product or products
should DOREMI Inc. devote its excess production?
a. DO, RE, MI
b. MI, DO, RE
c. RE, DO, MI
d. DO, MI, RE

7|Page
 13. If it has excess machine capacity but a limited amount of labor time, to which product or
products should DOREMI Inc. devote its excess production?
a. DO, RE, MI
b. MI, DO, RE
c. RE, DO, MI
d. DO, MI, RE

14. If it has excess amount of labor time but limited machine capacity, to which product or
products should DOREMI Inc. devote its excess production?
a. DO, RE, MI
b. MI, DO, RE
c. RE, DO, MI
d. DO, MI, RE

Problem 11. DC Corp has only 25 000 hours of machine time each month to manufacture its two
products, YOW and AI. YOW has a contribution margin of P50, and AI has a contribution margin of
P64. YOW requires 5 machine hours and AI requires 8 hours.

15. If DC Corp wants to dedicate 80% of its machine time to the product that will provide the
most income, how much will be its contribution margin?
a. 250,000
b. 240,000
c. 200,000
d. 40,000

Problem 12. JPR Inc. manufactures two products, SIMOUN and IBARRA. Contribution margin per unit is
determined as follows:

SIMOUN IBARRA
Revenue P130 P80
Variable costs (70) (38)
Contribution margin 60 42

Total demand for SIMOUN is 16 000 units and for IBARRA, 8 000 units. Machine hours is a scarce
resource. Only 42,000 machine hours are available during the year. SIMOUN requires 6 machine hours
per unit while IBARRA requires 3 machine hours per unit.

16. How many units of SIMOUN and IBARRA should JPR Inc. produce, respectively?
a. 3,000 and 8,000
b. -0- and 8,000
c. 16,000 and -0-
d. 7,000 and -0-

17. Choosing the best combination of products, determine the total contribution margin.
a. 516,000
b. 336,000
c. 960,000
d. 420,000

8|Page
KEEP OR DROP A DIVISION OR PRODUCT LINE

Decision problem: Should a business segment, which may be a product line, a department, or a
branch be continued or discontinued?

Decision guidelines: Continue if avoidable revenue of the segment involved is greater than its
avoidable costs; otherwise, consider dropping the segment. Since allocated fixed cost is usually
unavoidable, it is considered irrelevant.

What to look for?

1. Avoidable costs
2. Financial impact on the other divisions or lines

EXAMPLE. SHELDON Games has three major product lines, WII, PS1 and PS2. Due to concerns
regarding its profitability, he is considering dropping PS1. The following are the segmented income
statements of the three product lines:

WII PS1 PS2 TOTAL

Revenues P300,000 P200,000 P250,000 P750,000
Variable costs (90,000) (100,000) (100,000) (290,000)
Contribution margin P210,000 P100,000 P150,000 P460,000
Direct / Traceable fixed costs (50,000) (60,000) (70,000) (180,000)
Segment margin P160,000 P40,000 P80,000 P280,000
Allocation of common costs (90,000) (60,000) (75,000) (225,000)
Operating income P70,000 (P20,000) P5,000 P55,000

a. What is the impact of dropping PS1 on the overall profits of SHELDON? Should SHELDON drop
the PS1 product line?

b. If PS1 is in some way a complement for PS2 and as a result, closing down PS1 will decrease
PS2’s sales by 10%, should SHELDON drop the PS1 product line?

c. If PS1 is in some way a substitute for PS2 and as a result, closing down PS1 will increase PS2’s
sales by 10%, should SHELDON drop the PS1 product line?

Problem 13. CELLULAR Inc. plans to discontinue DAVAO branch that has a contribution margin of
P240 000 and P480 000 in fixed costs. Of the fixed costs, P210,000 can be avoided if DAVAO branch is
discontinued?

18. What is the effect of the discontinuance of DAVAO branch on CELLULAR’s overall net
operating income (indicate increase/decrease)?
a. 450,000 decrease
b. 270,000 decrease
c. 30,000 increase
d. 30,000 decrease

9|Page
Problem 14. Change Corp is deciding whether or not to eliminate BLACK Segment of its business.
BLACK segment generates total sales of P104 000, its direct expenses are P22 000, and its indirect
expenses are P26 000. Its cost of goods sold is P64 000. Only P6 000 pesos of the direct expenses and
P8 000 of the indirect expenses are avoidable.

19. Determine the incorrect statement.

a. The segment has a net loss of P8 000
b. The segment’s revenue is greater than its avoidable costs.
c. The segment is a good candidate for elimination.
d. The segment’s avoidable costs are greater than unavoidable costs.

Problem 15. TAPSI Restobar has two branches, TAPA and SISIG, The following segmented income
statements pertain to the two branches.

TAPA SISIG
Sales P1,000,000 P700,000
Variable costs (400,000) (280,000)
Contribution margin P600,000 P420,000
Direct fixed costs (100,000) (50,000)
Segment margin P500,000 P370,000
Common fixed costs (200,000) (140,000)
Net operating income P300,000 P230,000

TAPSI is considering eliminating the SISIG branch. Doing so will bring some of the existing
customers to the TAPA branch, thus sales in this branch will increase by 70%.

20. Determine the effect of the decision to eliminate SISIG branch on the overall profits of
TAPSI, indicate increase or decrease.
a. Increase by 50,000
b. Decrease by 50,000
c. Increase by 35,000
d. Some other amount

SELL OR PROCESS FURTHER

Decision problem: Should a product, after undergoing the joint process, be sold at the split-off point
or be processed further?

Decision guidelines: Process further if additional revenue from processing further is greater than
further processing costs.

What to look for?

1. Incremental cost
2. Opportunity cost

10 | P a g e
EXAMPLE. FRESH MEATY MEAT COMPANY manufactures two products from a common input in a joint
processing operation. Joint processing costs incurred up to split off point totaled $125,000 which is
composed of direct materials, direct labor and overhead. The company allocates these costs to the
joint products on the basis of no. of kilos generated from the joint process. Each product may be sold
at split off point or may be processed further and be sold at a higher selling price. The following table
details the no. of kilos produced and the incremental revenue and costs to process further each
product:
Thighs Breasts TOTAL
No. of kilos 1,000 1,500 2,500
Selling price per kilo at split off point $ 120 $ 170 ---
Further processing costs per kilo $ 30 $ 56 ---
Selling price after processing $ 165 $ 210 ---

a. Determine which product/s should be processed further?

b. What would be the total operating income if the company opted to sell both products at split
off point?
c. What would be the total operating income if both products are processed further before
selling them to customers?
d. What would be the total operating income if the company opted to do the most viable
decisions/alternatives?

Problem 16. ALEXA’s cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The
selling price (for the unfinished unit) per unit is P50. The company has unused production capacity
and has determined that units could be finished and sold for P65 with an increase in variable costs of
40%.

21. What is the additional net income per unit to be gained by finishing the unit?
a. P5.00
b. P2.00
c. P3.00
d. Some other amount

Problem 17. DAVID Corporation produces two products from a joint process. Information about the
two joint products follows:
Product X Product Y
Anticipated production 2000 lbs. 4000 lbs.
Selling price per pound at split off P30 P16
Additional processing cost/pound after split-off (all variable) 15 30
Selling price per pound after further processing 40 50

The joint cost is P85 000. DAVID currently sells both products at split-off point.

22. If DAVID makes the decision which maximizes profit, its profit will increase by?
a. 12,000
b. 13,000
c. 16,000
d. 18,000
11 | P a g e
Problem 18. TLC Productions schedules its weekly production of 15 000 units of TABLEs and 30 000 units
of CHAIRS for which P800 000 common variable costs are incurred. These two products can be sold
as is or processed further. Further processing of either product does not delay the production of
subsequent batches of the joint products. Below are additional data gathered:

TABLES CHAIRS
Unit selling price without further processing P 25 P 19
Unit selling price with further processing 31 23
Total separate weekly variable costs of further processing 100 000 110 000

23. To maximize TLC’s manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week should amount to
a. 85,000
b. 110,000
c. 105,000
d. 120,000

SHUT DOWN TEMPORARILY OR CONTINUE

Decision problem: Should the company temporarily shut down or continue its operations?

Decision guidelines: Decision lies on the avoidable costs and additional costs to be incurred once the
company restarts its operations (start-up costs).

What to look for?

1. Avoidable costs
2. Start-up costs

Problem 19. HANNAH Coffee Shop normally sells 30 000 cups of a coffee product, CLARICAF, every
month. A cup of coffee sells for P22; variable costs per cup is P14; fixed manufacturing overhead
costs total P150 000 each month; fixed selling costs total P30 000 each month.

Melamine contamination of milk in the country has caused HANNAH’s sales to drop only to 9 000 per
month. It will take two months before HANNAH will be able to convince the public that its coffee is
Melamine-free, after which sales will return to normal. Due to the current low level of sales, however,
HANNAH is thinking about closing its own plant during the two months it conducts the chemical tests
and publicizing the results of such. If the coffee shop will be closed, it is estimated that fixed
manufacturing overhead costs can be reduced to P105 000 per month and that fixed selling costs
can be reduced by 10%. Start-up costs at the end of the shutdown period should total P8 000.
HANNAH uses just-in-time production method; no inventories at hand.

24. In a strictly financial sense, should HANNAH Coffee Shop shutdown or continue?
a. Shut down
b. Continue
c. The company is indifferent
d. Cannot be determined

25. At what level of sales (in cups) for the two-month period should HANNAH be indifferent
between temporarily closing the Coffee Shop or keeping it open?
a. 11,000 or 5,500 per month
b. 12,000 or 6,000 per month
c. 14,500 or 7,250 per month
d. Some other answer

12 | P a g e
THEORETICAL

1. Which of the following costs would be relevant in short-term decision making?

a. incremental fixed costs
b. all costs of inventory
c. total variable costs that are the same in the considered alternatives
d. the cost of a fixed asset that could be used in all the considered
alternatives

2. The potential rental value of space used for production activities

a. is a variable cost of production.
b. represents an opportunity cost of production.
c. is an unavoidable cost.
d. is a sunk cost of production.

3. In a make or buy decision, the reliability of a potential supplier is

a. an irrelevant decision factor.
b. relevant information if it can be quantified.
c. an opportunity cost of continued production.
d. a qualitative decision factor.

4. Which of the following qualitative factors favors the buy choice in a make or buy decision for a
part?
a. maintaining a long-term relationship with suppliers
b. quality control is critical
c. utilization of idle capacity
d. part is critical to product

5. 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.

6. The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost.
b. variable production cost.
c. variable costs.
d. production cost plus a normal profit margin.

7. A manager is attempting to determine whether a segment of the business should be eliminated.

The focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the
segment.

8. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of
each product. Production capacity is unlimited. The company should produce the product (or
products) that has (have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

9. Which of the following costs is irrelevant in making a decision about a special order price if some
of the company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities

13 | P a g e
 d. opportunity cost of production

10. The opportunity cost of making a component part in a factory with excess capacity for which
there is no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.

11. In deciding whether an organization will keep an old machine or purchase a new machine, a
manager would ignore the
a. estimated disposal value of the old machine.
b. acquisition cost of the old machine.
c. operating costs of the new machine.
d. estimated disposal value of the new machine.

12. Most___________ are relevant to decisions to acquire capacity, but not to short-run decisions
involving the use of that capacity.
a. sunk costs
b. incremental costs
c. fixed costs
d. prime costs

13. A cost is sunk if it

a. is not an incremental cost.
b. is unavoidable.
c. has already been incurred.
d. is irrelevant to the decision at hand.

14. The term incremental cost refers to

a. the profit foregone by selecting one choice instead of another.
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly
allocable to any of them.

15. Which of the following is not a characteristic of relevant costing information? It is

a. associated with the decision under consideration.
b. significant to the decision maker.
c. readily quantifiable.
d. related to a future endeavor.

16. A fixed cost is relevant if it is

a. a future cost.
b. avoidable.
c. sunk.
d. a product cost.

17. Relevant costs are

a. all fixed and variable costs.
b. all costs that would be incurred within the relevant range of production.
c. past costs that are expected to be different in the future.
d. anticipated future costs that will differ among various alternatives.

18. Which of the following is the least likely to be a relevant item in deciding whether to replace an
old machine?
a. acquisition cost of the old machine
b. outlay to be made for the new machine
c. annual savings to be enjoyed on the new machine
d. life of the new machine

14 | P a g e
19. If a cost is irrelevant to a decision, the cost could not be
a. a sunk cost.
b. a future cost.
c. a variable cost.
d. an incremental cost.

20. Which of the following are relevant in a make or buy decision?

Variable Avoidable fixed Unavoidable fixed

costs costs costs

a. no yes yes
b. yes no yes
c. no no yes
d. yes yes no

15 | P a g e