Managerial Accounting Sample Multiple Choice Questions

ACG2071 Managerial Accounting SAMPLE Multiple Choice QUESTIONS- Chapters 20_23 Incremental Analysis Decisions Answers appear in red.

1. Which of the following is an example of a sunk cost?

A. Direct materials for products

B. Variable overhead for the current year

C. Equipment depreciation for last year

D. Future costs that might be saved

Sunk costs are those that cannot be changed and already been incurred.

2.A company wants to know if it should sell now or process further. Under what conditions should the company process further rather than sell now? A. If incremental revenues are greater than the cost incurred to date of the original units B.If variable processing costs exceed fixed processing costs C. If there are only incremental variable costs, and no incremental revenue. D.If there are no opportunity costs E.None of the above. The cost incurred to date is a sunk cost and is not relevant since it is the same no matter if the product is sold as is or processed further. Answer C would result in a greater loss if processed further since an increase in costs without an increase in revenue creates a bigger loss.

3. In deciding whether or not to process a product further or sell it as is, which of the following is a relevant cost?

A. Sunk cost B. Incremental cost C. Joint cost D. Irrelevant cost All incremental costs are relevant.

4.Which one of the following is irrelevant when deciding whether or not to drop a product line?

A. Variable production costs

B. Variable selling costs

C. Direct fixed costs

D. Allocated fixed costs

These costs will remain the same for the company whether a product line is dropped or not.

5. Why are sunk costs not considered relevant when choosing among alternatives?

A. GAAP considers them to be irrelevant. B. They remain the same among alternatives and do not add useful information for selecting an alternative. C. They are avoidable. D. They are considered future incremental costs.

6.Under what conditions might a manufacturing firm sell a product for less than its regular price? A. When the price offered for a short-term order is less than the contribution margin. B. If a firm has excess capacity that is sitting idle, and it can recover its incremental costs. C. When a company wants to obtain greater market share, even if the differential costs exceed differential revenue.

of 17ACG 2071 Sample MC Questions Chapters 20-23

D. If the incremental revenue exceeds the total variable costs. Note that answer D does not consider 'relevant' variable costs.

7. Which costs are usually avoidable in a make-or-buy decision? A. Direct materials, direct labor, and fixed and variable overhead B. Direct labor, direct material, and variable overhead

C. All costs allocated to the production process of the product that will not be made D. Fixed and variable manufacturing overhead Fixed overhead must be absorbed by the other divisions within a company.

8.Which one of the following is a qualitative advantage of making rather than buying a component? A. factory supervisor’s salaries

B. opportunity costs

C. delivery schedules

D. costs of transportation-in

The other costs are monetary.

9.Outsourcing

A. is the acceptance of a special order. B. occurs when a company’s avoidable costs exceed its unavoidable costs. C. costs are often called opportunity costs. D. decisions involves incremental revenues. E. is another name for buying, in a make or buy situation Answer A describes special orders.

10.What likely occurs if an unprofitable product is eliminated? A.Net income will increase. B. All expenses of the eliminated product will be avoided. C. The cost allocation death spiral occurs. D. Opportunity costs are eliminated. Because fixed costs must be reallocated to the other products.

11.Lakewood Industries is considering outsourcing a paint-spraying operation that is performed in manufacturing auto parts. The company has painting equipment with a book value of $100,000. If the operation is outsourced, the equipment will be scrapped for an amount equal to the cost of removing the equipment. Ignoring income taxes, is the book value of $100,000 relevant to the outsourcing decision? A. Yes, because it can be sold. B. No, because it is an incremental cost savings. C. Yes, because it is a sunk cost. D. No, because it is not differential.

12.Tucson Furniture Company makes chairs, tables, and beds from small pine logs which have been "peeled" of bark. Once a chair is constructed, it receives a wax finish. No finish is applied to the tables and beds. The cost of the wax finish is a(n) A. Sunk cost. B. Incremental cost C. Marketing cost. D. Period cost.

13.What is the cause of the cost allocation death spiral?


A. Not realizing that when a department that appears to be unprofitable is dropped, the common fixed costs are not incremental. B. A company decides to buy a product instead of making it, and the supplier is unable to meet the demand on a timely basis. C. Allocations of joint costs are made only to profitable products. D. Variable costs rise when sales decline, causing a decline in profits.

14. What are the components of incremental analysis?

A. Incremental revenues and incremental costs

B. Variable and fixed costs

C. The total revenues compared with total costs

D. Relevant and differential costs

15. Which costs are usually avoidable in a make-or-buy decision? A. Direct materials, direct labor, and fixed and variable overhead B. Direct labor, direct material, and variable overhead

C. All costs allocated to the production process of the product that will not be made

D. Fixed and variable manufacturing overhead

16. What is the role of opportunity costs in a make-or-buy decision?

A. They are not considered because they are sunk costs. B. They are always incremental costs and should be considered. C. They are avoidable so should not be considered in these decisions. D. They are irrelevant because they never involve out of pocket expenses in these decisions.

17. In a decision to retain or replace equipment, the cost of the old equipment is A. an opportunity cost. B. a sunk cost. C. an incremental cost. D. a variable cost.

18. Irby, Inc.’s market for the nibulators has changed significantly, and Irby has had to drop the price per unit from $100 to $80. There are some units in the work in process inventory that have costs of $65 per unit associated with them. Irby could sell these units in their current state for $60 each. It will cost Irby $10 per unit to complete these units so that they can be sold for $80 each. Which of the following is a sunk cost in this problem? A. $100 = former price B. $80 = current price C. $65 = price for partially completed units D. $10 = cost to complete units

19.If an unprofitable product is eliminated, A. net income will always increase. B. variable expenses of the eliminated product will have to be absorbed by other segments. C. fixed expenses allocated to the eliminated segment will not likely be avoidable. D. the company will lose it opportunity costs. The other divisions/products will have to absorb these costs.

20.An example of a qualitative performance measure is

A. increase in incremental revenues. B. opportunity costs.


C. output per hour. D. warmth of the hospital staff.

21.A disadvantage of using an outside supplier is that A. they may be able to produce a component at a lower cost. B. there is a loss of control over the production process. C. there may be an opportunity to expand other parts of the company. D. the supplier assumes some of the risk of a downturn in business activity. The materials may not be received on time, or may be of poorer quality.

22. Which of the following is not relevant when considering whether or not to drop a product?

A. The contribution margin

B. Qualitative factors

C. The potential impact on demand for other products

D. Allocated common costs

23. What is the cause of the cost allocation death spiral?

A.It is caused by not realizing that when a department that appears to be unprofitable is dropped, the common fixed costs that had been allocated to that department are not avoidable. B.It is caused by a company that manufacturing its products, rather than buying them. C.It is caused by not considering avoidable costs in a product dropping decision. D.It is caused by accepting special orders for a sales price that is less than the contribution margin per unit. While answers B, C, and D are possible happenings for a company, they are not the cause of the cost allocation death spiral.

24. What is the role of opportunity costs in a make-or-buy decision? A.They are always incremental costs and should be considered in a make-or-buy decision. B.They are treated the same as sunk costs since they relate to costs that cannot be changed. C.They are not relevant so they should be ignored. D.They are not considered since there is no actual expense related to them. They are incremental since these are amounts that could be obtained under one alternative and must be given up for the other alternative. A. There is a loss of control over the production process. B. The outside supplier may have lower manufacturing costs due to higher volume. C. Employee morale may be increased due to the decrease in workload. D. The total cost per unit most always increases. Answer B is an advantage.

26. In a decision to replace an old machine with a new machine, which of the following is considered a relevant cost? A. The book value of the old equipment B. Depreciation expense on the old equipment C. The loss on the disposal of the old equipment D. The current disposal price of the old equipment Only incremental costs are relevant.

27. Which costs are usually avoidable in a make-or-buy decision? A.Direct materials, direct labor, variable overhead, and often a portion of fixed manufacturing overhead

B. Only direct materials, direct labor, and variable overhead, and not fixed manufacturing overhead

C. All the direct and allocated costs incurred to manufacture a product


D. Only fixed manufacturing costs related to the product. Allocated fixed costs are most often not avoidable. Since product costs include some allocated fixed costs, answer C cannot be correct.

28. The decision to drop a product line should be based on A. the fact that the product line shows a net loss over several periods. B. the ability of the firm to eliminate some fixed costs as a result of dropping the product. C. whether the product line has a positive contribution margin or not. D. whether the fixed costs that can be avoided by dropping the product line are greater than the

contribution margin lost.

29. Great Accounting Bookshop has a small coffee shop in the front of the store. The store manager is considering upgrading the coffee to a super-premium brand imported from Hawaii. Currently, the store uses 10 pounds of coffee per week. The super premium coffee will cost $1.00 more per pound. However, the manager believes that the upscale coffee will add to the ambiance of the bookstore. Taking the effect on ambiance into account is an example of considering A. qualitative factors. B. incremental costs. C. a fixed cost. D. committed costs.

30. Which costs are always incremental and relevant in decision analysis?

A. Avoidable costs and opportunity costs

B. Common fixed costs and avoidable costs

C. Sunk costs and avoidable costs

D. Common fixed costs and opportunity costs

Sunk costs are never relevant. Common fixed costs are most often unavoidable so they are not incremental to the decision.

31. Relevant costs in accepting an order at a special price include all of the following except A. Direct materials. B. Direct labor. C. Fixed manufacturing overhead

D.Variable manufacturing overhead. Fixed overhead costs continue.

32. Which one of the following is an important assumption that is made when considering the decision to accept an order at a special price? A. There are no mixed costs. B. The company is not currently operating at full capacity

C. Overall economic growth will continue at historical rates. D. The company will continue to receive similar orders in the future. If a company has no capacity, it must incur additional fixed costs in order to accept the order.

33. In a make or buy decision, opportunity costs are A. common costs because they represent benefits for all products. B. incremental. C. unavoidable so should be treated as fixed costs. D. ignored because they are not relevant They are also relevant since they differ between alternatives.


34. Another name for the option to buy a component from a supplier isA. opportunity costing. B.the death spiral. C.outsourcing. D.joint cost allocation.

35. All of the following are relevant in deciding whether to eliminate an unprofitable product line except A. Sales

B. Variable expenses. C. Avoidable fixed expenses. D. Allocated fixed expenses.

36. When a product line is dropped, the fixed costs allocated to the eliminated product A. are avoided. B. must be absorbed by the remaining segments

C. are written off. D. are allocated to the product that was dropped. Often causes the cost allocation death spiral.

37.Which of the following is a true statement about qualitative factors involved in making decisions involving incremental analysis? A. Qualitative factors should be carefully considered in making decisions involving incremental analysis. B. There are no negative, qualitative effects of eliminating one of a company's product lines. C. Because qualitative factors cannot be easily measured, they should be ignored in making decisions involving incremental analysis. D. The morale of laid-off employees will improve with a decision to shut down the plant where they work because even though they don't have a job, they know the firm will be more profitable.

38. In a make or buy decision, opportunity costs are A. common costs because they represent benefits for all products. B. sunk. C. unavoidable so should be treated as variable costs D. relevant.

39. Remembering that common fixed costs are not incremental when analyzing whether a product line should be dropped will help one avoid A. operating losses. B. the cost allocation death spiral. C. outsourcing. D. joint cost allocation.

40. Gordon and Jackson, CPAs, currently work a five-day week. They estimate that net income for their accounting firm would increase by $40,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a five-day work week is an example of A. differential revenue B. opportunity cost C. sunk cost D. differential income An opportunity cost is the amount forgone as a result of accepting another action.


41.Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than 100% capacity, and the additional business will not use up the remainder of the plant capacity? A. Fixed administrative expenses B. Variable factory overhead C. Per hour cost of direct labor D. Variable selling expenses Fixed administrative costs are not avoidable and as such, are not relevant to the decision. These amount will continue regardless if the company produces additional units or not.

42.A company was evaluating the differences between two copiers. Which one of the following would be a qualitative aspect of making the decision?

A. The number of copies produced per minute is different. B. The dimensions of one of the printers require purchasing a new table. C. The printers will collate output at different rates. D. The color of one of the printers matches the color of the computer it will be attached to. Choosing a blue versus a red copier does not change the cost. The other alternatives would affect the cost or production ability of the company.

43.What are the components of incremental analysis?

A. Incremental revenues and incremental costs

B. Variable and fixed costs

C. The total revenues compared with total costs

D. Relevant and differential costs

44.Which decision will involve no incremental revenues? A.Outsourcing versus insourcing decision B. Drop a product line C. Accept a special order D. Additional processing decision This is the same as a make or buy decision. Only incremental costs are concerned. The decision does not affect the amount of revenue.

45. Three weeks ago, Brian Schwan paid $30 for a non-refundable ticket to tonight’s concert. Now he’s been invited to a party, too. He can’t go to both, but the party sounds like more fun than the concert. In deciding whether to attend the concert or the party, which of the following is(are) relevant?A. The $30 cost of the ticket. B. His grade on the Accounting test he took earlier today. C. The $50 his roommate will pay him for the concert ticket. D. All of these E. None of these The $30 paid to buy the ticket is a cost regardless if he goes to the concert or not. The test grade will not change regardless if he goes to the concert.

46. Which one of the following is not a disadvantage of outsourcing? A. Quality control specifications and delivery schedules may not be met. B. The outside supplier may raise prices significantly in the future. C. Profitable product lines may be dropped. D. Employee morale may suffer. Outsourcing is a make or buy decision, not a product line dropping decision.


47. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when A. incremental revenues exceed incremental costs. B. additional fixed costs must be incurred to accommodate the order. C. the company placing the order is in the same market segment as your current customers. D. it never makes sense. Only direct costs are incremental.

48. Sunk costs A. are relevant. B. are differential. C. have future implications. D. are ignored when evaluating alternatives. Differential means incremental.

49.When deciding to accept a one-time-only special order from a wholesaler, management should do all EXCEPT

A. analyze product costs. B. consider the special order’s impact on future prices of their products. C. determine whether excess capacity is available. D. verify past design costs for the product. Past design costs are sunk since they stay the same no matter if the one time order is accepted or not.

50.Relevant costs of a make-or-buy decision include all EXCEPT

A. fixed salaries that will not be incurred if the part is outsourced. B. current direct material costs of the part. C. special machinery for a component that has no resale value. D. material-handling costs that can be eliminated. Only incremental costs are relevant (those costs that are different if the items are made instead of bought. Since the cost of the special machinery is the same regardless of decision, this cost is not relevant.

51.Baird Scissors Company utilizes Ruthrauff Blades, Inc. by acquiring pre-sharpened blades for it scissors manufacturing division. As it pertains to Baird Scissors, this practice is known as

A. insourcing. B. outsourcing. C. relevant costing. D. sunk costing. Ruthrauff is a supplier of parts for Baird's manufacturing division. If Baird buys these parts, it is outsourcing. If Baird made these parts, it would be insourcing. Note that these terms were an integral part of our discussions for make or buy decisions in class.

52.For make-or-buy decisions, which items are relevant? A. direct material costs and sunk costs B. incremental costs and opportunity costs C. differential costs and allocated fixed costs D. incremental costs and incremental revenues. There are never any incremental revenues with make or buy decisions. Sunk costs are never relevant. Allocated fixed costs do not go away when a make or buy decision occurs.


53.Fixed costs A. are always incremental. B. can be incremental or sunk. C. are always sunk. D. are always unavoidable. Some fixed costs are unavoidable so they are sunk. Avoidable fixed costs are relevant (incremental).

54.Which one of the following is qualitative information that management might evaluate in making a decision? a.Opportunity costs of a decision

b.Contribution margin c. The effect on profit of a decision d.The effect on employee morale of a decision Qualitative information involves no dollar amounts. There are dollar amounts associated with opportunity costs (cost savings), contribution margin (sales less variable costs), and the effect on profit. Employee morale cannot be quantified however, its effect may be an influence on managment decisions.

55. A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts a special order, what will occur? a.Incremental costs will not be affected. b.Net income will increase if the special sales price per unit exceeds the unit variable costs. c. There are no incremental revenues. d.Both fixed and variable costs will increase. If a special order is accepted, the company will be selling more products, so both sales and variable costs increase. Since fixed costs are generally common, they must be absorbed by the company regardless of whether the special order is accepted or not. Most often fixed costs are not relevant.

56. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Which cost 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 This cost is not relevant since it cannot be avoided, i.e., the fixed cost is the same regardless if the company accepts additional business or not.

57.What is the role of opportunity costs in a make-or-buy decision? A. They are always relevant and should be considered in a make-or-buy decision. B. They are treated as sunk costs. C. They are not incremental so they should be ignored. D. They are not considered since there is no actual expense related to them.

58.Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a.The cost of the old equipment b.The salvage value of the old equipment c. The book value of the old equipment d.The accumulated depreciation of the old equipment


Salvage value is relevant since this is the amount the equipment will bring into the company if sold. The other three amounts remain the same regardless if the machine is replaced or not.

59.Which decision will involve no incremental revenues? a. Make or buy decision b. Drop a product line c. Accept a special order d. Additional processing decision A company does not change its selling price due to a decision to buy instead of making a product.

60. Which of the following is most often a differential cost?

A.Depreciation B.Rent C.Variable overhead D.Fixed overhead Fixed costs are rarely incremental since they do not differ between alternatives.

61.Which one of the following costs should not be taken into consideration when making a decision?

A.Opportunity costs. B.Relevant costs C.Differential costs D.Unavoidable costs Answers A, B, and C all have the same meaning.These are terms for costs that differ between alternatives. Unavoidable costs never differ between alternatives since they are the same regardless of decision.

62.For which one of the following is incremental analysis not applied? A.Decision to engage in additional processing of a product B.Decision to make or buy a product C.Decision to drop a product line D.Allocation of joint costs to products

Incremental analysis involves determining the costs and revenues which differ between alternatives.

63.When deciding to accept a special order from a new customer, which one of the following is not necessary by management? A. Reallocate overhead costs to additional products B. Consider the special order’s impact on demand of other products C. Determine whether excess capacity is available D. Determine product costs Allocated costs, most often fixed costs, are unavoidable, and therefore, not relevant, i.e., they will continue to be a cost regardless of what decision is made. All relevant (incremental) costs are ignored in incremental analysis since they are not incremental. If demand of other products fall, the special order may not increase profits. If capacity is not available to manufacture the special order, additional costs will be necessary, so the special order may not increase profits. Since most product costs are variable, determining their cost is necessary to incremental decisions such as special orders.

64.What is insourcing? A. The allocation of common fixed costs to different product lines B. What occurs when a company’s avoidable costs exceed its unavoidable costs C. Another name for opportunity costs D. Decisions of whether to accept a special order


E. Internally manufacturing products Insourcing is the 'make' part of the make or buy decision.

65.Which one of the following is a qualitative advantage of making rather than buying a component? A. factory supervisor’s salaries B. opportunity costs C. delivery schedules D. costs of shipping goods into the company’s own factory Answers A, B, and C are all quantitative amounts which appear in budgets. Delivery schedules are a consideration of buying instead of making since the timing of when components arrive can affect production.

66.For make-or-buy decisions, which items are relevant? A. incremental costs and incremental revenues. B. direct material costs and sunk costs C. differential costs and incremental revenues D. differential costs and allocated fixed costs E. incremental costs and opportunity costs There are no incremental revenues with make or buy decisions, so answers A and C cannot be correct. Answer B is wrong because sunk costs are never relevant since they cannot be changed. Answer D is wrong because allocated fixed costs are always relevant. Opportunity costs are always relevant. Incremental costs is another name for relevant and differential costs.

67.Fixed costs

A. can be relevant or sunk. B. are always sunk. C. are always unavoidable. D. are always incremental. Some fixed costs are avoidable, and therefore relevant. Others are allocated and cannot be avoided.

68.Dell Computer acquires pre-built DVD drives for computer manufacturing division from Rom, Inc. As it pertains to Dell Computer, what decision situation does this create? A. Whether to accept a special order B. Outsourcing versus insourcing C. Relevant versus non-relevant costing D. Drop or continue a product line If Dell buys pre-built drives, Dell is outsourcing. If Dell manufactures the drives, it is insourcing.

69. Which costs are always incremental and relevant in decision analysis? A.Avoidable costs and opportunity costs B.Unavoidable costs and avoidable costs C.Unavoidable costs and opportunity costs D.Controllable and opportunity costs Controllable costs are not all relevant. Unavoidable costs stay the same between two alternatives, so they are not relevant.

70. Which one of the following is not a disadvantage of buying rather than making a component of a company’s product? A. Quality control specifications may not be met. B. The outside supplier could increase prices significantly in the future. C. Profitable product lines may be dropped.


D. The supplier may not deliver on time. The other three answers are disadvantages, i.e., reasons why a company may want to make instead of buy. Answer C addresses a different incremental decision, not a make or buy decision.

71.Which of the following describes one aspect of incremental analysis? A.Both costs and revenues that stay the same between alternate courses of action will be analyzed. B.Only differential costs and differential revenues will be analyzed. C.Only costs that differ between alternate courses of action will be analyzed. Revenues are not relevant. D.Only costs relating to the decisions at hand are analyzed. Differential = incremental = relevant. Incremental analysis involves both incremental revenues and incremental costs--only items that differ between alternatives.

72.For which of the following decisions is incremental analysis not appropriate? A.Elimination of an unprofitable product B.Determination of volume variances C.An outsourcing-insourcing decision D.Whether to accept a special order Answer B is not an incremental analysis decision.

73.Which of the following is not relevant when considering whether or not to drop a product?

A.The contribution margin B.Qualitative factors

C.The potential impact on demand for other products

D.Allocated common costs

Allocated common costs must be reallocated to remaining products. In total, the same allocated common costs is incurred regardless if the product line is dropped or not. Demand on other products should be considered since it causes a change in profits for the company as a whole.

74. Company A has excess capacity. Under what conditions should the company accept a one-time-only special order for less than its current selling price? A. Never because it would cause a loss. B.Only when incremental revenues exceed incremental costs C. When fixed costs are unavoidable D. When the order is placed by a new customer Incremental revenues minus incremental costs equal incremental profits.

75.Which one of the following is a qualitative advantage of making rather than buying a component? A. production time B. opportunity costs

C. sunk costs

D. customer satisfaction Production time creates labor hours which have a cost. Opportunity costs are dollars given up or saved as a result of selecting one alternative. Sunk costs are not relevant.

76.Which costs are always incremental and relevant in decision analysis? A Differential costs and unavoidable costs B. Common fixed costs and opportunity costs C. Common fixed costs and avoidable costs D. Avoidable costs and opportunity costs Unavoidable stay the same so they are not relevant. Common fixed costs are allocated and as such


are unavoidable.

77. In decision-making, which of the following statements is true?

A.Variable costs can always be viewed as relevant. B.Fixed costs can always be viewed as not relevant. C. Variable costs may or may not be relevant. D. Fixed costs can always be viewed as relevant. Relevant means the cost will differ between alternatives. Some variable costs are relevant, while others are not. Most fixed costs are not relevant, however some are. 78. Which one of the following is not a disadvantage of outsourcing? A. Quality control specifications and delivery schedules may not be met. B. The outside supplier may raise prices significantly in the future. C. Profitable product lines may be dropped. D. Employee morale may suffer. This has nothing to do with outsourcing (make or buy decisions)

79. Which one of the following is a disadvantage of buying rather than making a component of a company’s product? A. Quality control specifications may not be met. B. The outside supplier can often produce items at a lower cost than the company. C. Unprofitable product lines cannot be eliminated. D. The supplier may use fewer cost pools. The cost incurred and the number of cost pools used by the outside supplier do not affect the price the buyer will pay the outsider supplier.

80. Which costs are always relevant in decision analysis? A.Unavoidable costs and avoidable costs B.Unavoidable costs and opportunity costs C.Avoidable costs and opportunity costs D.Controllable and opportunity costs Unavoidable costs are the same regardless of which decision is made. Opportunity costs are those amount given up when an alternate decision is made.

81. The basic quantitative rule in a make or buy decision is to buy as long as the cost to buy is A. Less than the incremental cost to make B. More than the incremental cost to make C. Less than the total manufacturing cost per unit D. More than the total manufacturing cost per unit The total manufacturing cost most often includes non-relevant amounts. Only incremental amounts are considered in incremental analysis.

82.What causes the cost allocation death spiral? A. A company decides to buy a product instead of making it, and the supplier is unable to meet the demand on a timely basis. B. Allocations of fixed costs are made only to profitable products. C. Variable costs rise when sales decline, causing a decline in profits. D.Common fixed costs are not incremental when a product or line is dropped.

84. A company was evaluating the differences between two packaging machines. Which one of the


following would be a qualitative aspect of making the decision?

A. The number of products packaged per hour is different. B. One machine is smaller allowing the company to lease out a portion of its facility. C. The machine will not pollute the environment. D. The machines will package products at different rates. There is no cost associated with environmental pollution (assuming no fine is assessed.) Producing a different number of products creates an effect on income. Answer B is an opportunity cost.

85.Which decision will involve no incremental revenues? A. Drop a product line B. Accept a special order C. Additional processing decision D. Make or buy decision A company does not change it selling price just because it decides to change whether it manufactures or buys it products.

87. Which of the following is never relevant in a make or buy decision? A. indirect materials B. incremental revenues C.supervisory salaries D.opportunity costs

There are no incremental revenues in make or buy decisions because the company is making a change to the cost of production (to manufacture or to buy), and is not making a change to the selling price (revenue). Opportunity costs are always relevant because they represent an amount to be earned if one of the alternatives is chosen. It is possible that supervisory salaries can be eliminated if a supervisor is terminated because he or she is no longer needed. Material used (whether direct or indirect) are usually based on the number of products produced.

88. Which one of the following is an important assumption that is made when considering the decision to accept an order at a special price? A. There are no mixed costs. B. The company's overall economic growth will continue at historical rates. C. The company has only fixed costs. D. The company is operating at less than capacity. In all costs systems, there will always be mixed costs, and the nature of the costs does not impact whether a special order is accepted. Growth of the company has no effect on whether the company will increase or not.

89. Which of the following is one disadvantage of using an outside supplier? A. The supplier may be able to produce a component at a lower cost. B. There is increased control over the production process. C. There may be delays in acquiring materials on time. D. The supplier assumes some of the risk of a downturn in business activity. Answer D is an advantage for the company since manufacturing is a risk a company takes when it produces products that might not be sold. Answer A is an advantage since this is a primary reason that a company would outsource. Answer B is wrong because outsourcing creates decreased, not increased control.

90. When a department or product line is dropped, the fixed costs which had been allocated to that department


A.are eliminated. B.become avoidable costs. C.are allocated to the remaining departments or product lines. D.become opportunity costs. Allocated costs are spread out to the products/divisions that use the costs. If a product is eliminated, those costs continue and must be reallocated over the remaining products/lines. Unless specifically implied, allocated fixed costs are never eliminated, so they are not incremental. Avoidable means they are eliminated, which is not the case (they could be called unavoidable.)

91. Which of the following costs are always incremental and relevant in decision analysis? A.opportunity costs and fixed costs B. avoidable costs and opportunity costs C.differential costs and unavoidable costs D.sunk costs and avoidable costs

Sunk costs are already spent and cannot be changed no matter what alternative is chosen. Unavoidable costs continue no matter what decision is made. Some fixed costs are avoidable and some are unavoidable. Differential = relevant = incremental.

92.Outsourcing

A. is the acceptance of a special order.

B. occurs when a company’s avoidable costs exceed its unavoidable costs. C. costs are often called opportunity costs. D. decisions involves incremental revenues. E.some other answer. Outsourcing is another name for the 'buy' part of a make or buy decision. Thre are no incremental revenues with make or buy decisions.

93.Which of the following costs should not be taken into consideration when making a decision?

Sunk costs are costs incurred in prior periods and therefore can not be changed.

94. Which of the following is most often not relevant when considering whether or not to drop a product? A. the contribution margin. B. Qualitative factors. C. The potential impact on demand for other products. D. Allocated common costs. Total common costs remain the same regardless of the product line is dropped or not.

95.What causes the cost allocation death spiral?

A. The incremental variable costs are greater than incremental revenue. B. A company fails to recognize that allocated costs are not avoidable. C. A company manufactures components when it is less costly to buy from an outside source.

D. Product costs are allocated using too few cost pools. When fixed costs are allocated, they do not disappear when a division or product is eliminated. They must be allocated to the other products, so the total fixed costs are the same whether dropped or not. As a result, profits decline even further for the company as a whole than when an unprofitable product

A. Opportunity costs. B. Sunk costs. C. Relevant costs. D. Differential costs.


was not dropped.

96. SMP Company's market for the Model 64 has changed significantly, and SMP has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. SMP could sell these units in their current state for $100 each. It will cost SMP $10 per unit to complete these units so that they can be sold for $125 each. Which of the following is not a relevant value in this problem? A. $265 = former price B. $125 = current price

C. $100 = price for partially completed units D. $10 = cost to complete units Two costs are not relevant since the profits remain the same regardless if SMP is dropped or not. The original selling price of $265 does not make the company more or less profitable. The $150 cost exists regardless of the decision made.

97.UNF Bookstore usually closes at 5:00 pm, but the manager wants to know about the extra costs involved by letting the store stay open until 9:00 pm. The store manager has listed the following monthly expenditures and their related costs:

Which of the above cost items would be relevant to the decision about staying open extra hours? A.1, 2, 3, and 4 B.2, 3, and 4 C.2 and 3 D.3 and 4 Relevant costs are those that will differ between alternatives. The salary and rent will stay the same regardless if the store stays open longer. The other costs will increase because wages are hourly and more hours of wages will be required, and more hours of utilities will be needed which increase total costs.

98. All of the following describe a sunk cost except A. opportunity cost. B. irrelevant cost.

C. historical cost. D. cannot be changed.

Sunk costs are those that cannot be changed and already been incurred.

99.A company wants to know if it should make or buy a product its sells. Under what conditions should the company buy instead of make? A. If incremental revenues are greater than the incremental cost. B.If the cost to buy is less than the revenue earned when sold. C.If all incremental fixed costs are avoidable. D. If incremental fixed cost savings plus incremental variable cost savings are greater than the cost to buy. E. If the total cost to buy is less than the total cost traced and allocated to the product for manufacturing purposes. Since there are no incremental revenues with make or buy decisions, answers A and B cannot be correct. Being able to avoid fixed costs does not mean the cost to buy will be less than the cost to make. Allocated costs are not relevant unless they are avoidable so they will not impact the decision

1. Manager salary $40,000 per year 2. Store rent $5,000 per month 3. Sales’ associates wages $9 per hour 4. Store utilities $4 per hour


to make or buy.

100.ZInCo makes doll furniture from birch logs. Zinco has decided to make the couches more appealing. Once a doll couch is constructed, it plans to cover it with upholstery. No upholstery will be applied to the tables and beds. What is the nature of the cost of the upholstery?

A. Sunk cost. B. Opportunity cost. C. Differential cost. D. Unavoidable cost. Incremental = relevant = differential. Sunk costs are never incremental.


Managerial Accounting Sample Multiple Choice Questions

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