SHORT-TERM NON-ROUTINE DECISIONS

Accounting 143

Name: _______________________________, CPA Section: _________ Score: __________

IDENTIFICATION. Identify whether the following items are relevant or irrelevant for each
proposal. Write R if relevant and I if irrelevant. Treat each proposal independently.

Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two
alternative proposals related to these parts. The first proposal is for buying Part A. This would free up
some of the plant space for the manufacture of more of Part B and assembly of the final product. The
product vice president believes the additional production of the final product can be sold at the current
market price. No other changes in manufacturing would be needed. The second proposal is for buying
new equipment for the production of Part B. The new equipment requires fewer workers and uses less
power to operate. The old equipment has a net disposal value of zero.

Proposal 1 Proposal 2
1. Total variable manufacturing
overhead, Part A
2. Total variable manufacturing
overhead, Part B
3. Cost of old equipment for
manufacturing Part B
4. Cost of new equipment for
manufacturing Part B
5. Total administrative and selling
expenses
6. Total variable costs of assembling
final products

7. Total direct manufacturing

materials, Part A
8. Total direct manufacturing
materials, Part B
9. Total direct manufacturing labor,
Part A
10. Total direct manufacturing labor,
Part B

MULTIPLE CHOICE. Write the letter corresponding to your answer on the space provided. Erasures are
strictly not allowed.

_______1. A company’s approach to a make buy decision:

a. Depends on whether the company is operating at or below breakeven.
b. Depends on whether the company is operating at or below normal volume.
c. Involves an analysis of avoidable costs.
d. Should use absorption costing.

_______2. Sunk costs:

a. Are substitutes for opportunity costs.
b. In and of themselves are not relevant to decision making.
c. Are relevant to decision making.
d. A reasonable separation of costs into their fixed and variable components.

_______3. The term “relevant cost” applies to all the following decision situations except the:
a. Acceptance of a special order.
b. Manufacture or purchase of component parts.
c. Determination of a product price.
 d. Replacement of equipment.

_______4. In equipment replacement decisions, which one of the following does not affect the decision
making process?
a. Current disposal price of the old equipment.
b. Operating costs of the old equipment.
c. Original fair market value of the old equipment.
d. Cost of the new equipment.

_______5. In 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.

_______6. 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.

_______7. Which of the following is not a characteristic of relevant costing information?

a. Associated with the decision under consideration.
b. Significant to the decision maker.
c. Readily quantifiable.
d. Related to a future endeavor.

_______8. A fixed cost is relevant if it is:

a. Avoidable.
b. Sunk.
c. A product cost.
d. A future cost.

_______9. 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.

_______10. 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.

_______11. 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.
_______12. 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.

_______13. Irrelevant cost generally includes:

a. Sunk costs and historical costs.
b. Historical costs and allocated costs.
c. Sunk costs and allocated costs.
d. All of the above.

_______14. Which of the following are relevant in a make or buy decision?

a. Variable costs and avoidable fixed costs.
b. Prime costs and unavoidable fixed costs.
 c. Fixed costs, whether avoidable or not.
d. None of the above.

_______15. In a make or buy decision, the opportunity cost of capacity could:

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

_______16. When a scarce resource such as space exists in an organization, the criterion that should
be used to determine production is:
a. Contribution margin per unit.
b. Selling price per unit.
c. Contribution margin per unit of scarce resource.
d. Total variable costs of production.

_______17. Fixed costs are ignored in allocating scarce resource 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.

_______18. The minimum selling price that should be acceptable in a special order is equal to total:
a. Production costs.
b. Variable production costs.
c. Variable costs.
d. Production costs plus a normal profit margin.

_______19. Which of the following costs is irrelevant in making a decision about a special order price if
some of the company facilities are idle?
a. Direct labor.
b. Equipment depreciation.
c. Variable cost of utilities.
d. Opportunity cost of production.

_______20. 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
(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.

_______21. For a particular product in high demand, a company decreases the sales price and
increases the sales commission. These charges will not increase:
a. Sales volume.
b. Total selling expenses for the product.
c. The product contribution margin.
d. Total variable cost per unit.

_______22. Processor, Inc. produces product A in a joint manufacturing process. Processor is studying
whether to sell Product A at the split off point or process it further into Product AA. Which of
the following information should not be considered by Process, Inc. in a sell or process
further decision?
a. Selling price of Product AA.
b. Joint production cost to produce Product A.
c. Variable manufacturing cost to produce Product AA.
d. Avoidable fixed cost to produce Product AA.

_______23. An increase in direct fixed costs could reduce all of the following, except:
a. Product line contribution margin.
b. Product line segment margin.
c. Product line operating income.
d. Corporate net income.

_______24. When a company discontinues a segment, total corporate costs may decrease in all of the
following categories, except:
a. Variable production costs.
 b. Allocated common costs.
c. Direct fixed costs.
d. Variable period costs.

_______25. In evaluating the profitability of an organizational segment, all ______________ would be

ignored.
a. Segment variable costs.
b. Segment fixed costs.
c. Costs allocated to the segment.
d. Period costs.

_______26. Which of the following must be considered in determining the relevance of a particular cost
to a decision?
a. Verifiability and accuracy of cost.
b. Potential effect of the cost on the decision.
c. Amount of cost.
d. Riskiness of the decision.

_______27. Which of the following statements about relevant or differential cost analysis is correct:
a. All variable costs are relevant.
b. All fixed costs are irrelevant.
c. All variable and fixed costs to be incurred are considered as they change with each
decision alternative.
d. All future costs are relevant.

_______28. Which of the following statement about a make or buy decision analysis is not correct?
a. Available resources should be used as efficiently as possible before outsourcing.
b. The analysis should involve available costs only.
c. If the total relevant cost of production is less than the cost to buy the item, it should
be produced in-house.
d. The decision depends on whether the company is operating at or below the normal
capacity.

_______29. A company’s manager wants to make a decision whether to sell Product A or process it
further to produce Product B. In this decision making analysis, the manager should
consider only the relevant revenues and costs, which are the:
a. Final sales value and total costs after processing Product A further.
b. Sales value of Product A and the cost to produce Product B.
c. Increase in sales value if Product B is produced and the cost to process Product A
into Product B.
d. Gross profit from Product A and revenue from Product B.

_______30. Incremental analysis would not be appropriate for a (an):

a. Make or buy decision.
b. Allocation of limited resource decision.
c. Elimination of an unprofitable segment.
d. Analysis of manufacturing cost variances.

_______31. What is the first step in the decision making process?

a. Specify the criteria by which the decision is to be made.
b. Consider the strategic issues regarding the decision context.
c. Perform an analysis in which the relevant information is developed and analyzed.
d. Compare the alternatives.

_______32. A major accounting contribution to the managerial decision making process in evaluating
possible courses of action is to:
a. Assign responsibility for the decision.
b. Provide relevant revenue and cost data about each course of action.
c. Determine the amount of money that should be spent on a project.
d. Decide which action the management should consider.

_______33. The Health Care Division of Piedmont Insurance employs three claims processors who are
capable of processing 5,000 claims each. The division currently processes 12,000claims.
The manager has recently been approached by two sister divisions. Auto Division would
like Health Care Division to process approximately 2,000 claims. Property Division would
like the Health Division to approximately process 5,000 claims. The Health Care Division
would be compensated by Auto Division or Property Division for processing these claims.
 Assume that these are mutually exclusive alternatives. Claims processor salary cost is
irrelevant for:
a. Auto Division alternative only.
b. Property Division alternative only.
c. Both Auto Division and Property Division alternatives.
d. Neither Auto Division nor Property Division alternatives.

_______34. Which of the following is(are) true statement(s) about cost behavior in incremental
analysis?
a. Fixed costs will not change between alternatives.
b. Variable costs will always change between alternatives.
c. Fixed costs may change between alternatives.
d. Both B and C.

_______35. Sensitivity analysis is useful in decision making when:

a. There is degree of uncertainty about the relevant data.
b. There is an opportunity cost included in the analysis.
c. Sunk cost included in the analysis.
d. The analysis is subject to a review by the management.

_______36. Unit costs can mislead decision makers. Which of the following situations dealing with unit
costs is not expected to result in a faulty analysis?
a. Unit costs used in make or buy decisions might include costs such as avoidable
fixed costs.
b. Variable unit cost directly varies with the changes in production units.
c. Total fixed costs increase as more units are produced within the relevant range.
d. Contribution margin on products that can be manufactured is using the freed
capacity is irrelevant in the decision.

_______37. Which of the following is a cost that requires future outlay of cash and is relevant for future
decision making?
a. Out of pocket costs.
b. Opportunity costs.
c. Relevant benefits.
d. Incremental revenue.

_______38. The best characterization of an opportunity cost is that it is:

a. Relevant to decision making but is usually reflected in the accounting records.
b. Not relevant to decision making and is not usually reflected in the accounting
records.
c. Relevant to decision making and is not usually reflected in the accounting records.
d. Not relevant to decision making and is usually reflected in the accounting records.

_______39. Manufacturing the parts internally by a company causes:

a. The company to be dependent upon suppliers for timely delivery of parts.
b. A company’s operations to be more efficient than when the parts are purchased
from suppliers.
c. The quality of the parts to be under the control of the company.
d. Lower cost of production of the parts being assured.

_______40. A company should decide to make, rather than buy, a part required for their product, if the:
a. Company’s production facility is at full capacity.
b. Relevant cost per unit of making the part exceeds the per unit relevant costs of
purchasing the part.
c. Supplier of the part can produce a higher quality part.
d. Supplier of the part has questionable reliability.

_______41. In making a special order, management should:

a. Compute a reasonable sales price for items not normally produced.
b. Consider additional overhead cost.
c. Consider normal and relevant costs.
d. All of the given choices.

_______42. An opportunity cost commonly associated with a special order is:

a. The contribution margin on lost sales.
b. The variable cost of the order.
c. The additional fixed cost that is related to the increased output.
d. All of the given choices.
_______43. Which of the following factors should be considered in deciding whether to accept a special
order?
a. The sales price of the product or service.
b. The production capacity of the company.
c. The impact on regular customers.
d. All of the given choices.

_______44. If there is excess capacity, the minimum acceptable price for a special order must cover:
a. Variable costs associated with the special order only.
b. Variable and fixed manufacturing costs associated with the special order only.
c. Variable and incremental fixed costs associated with the special order only.
d. Variable costs and incremental fixed costs associated with the special order plus
the contribution margin usually earned on regular units.
_______45. How does a company determine whether to sell a product “as is” or process it further?
a. If the costs to process further exceed the costs of current production, the product
should be sold “as is.”
b. If the increase in revenue from selling the product after further processing is greater
than the additional costs incurred in further processing, the company should opt for
further processing.
c. If the costs to process further exceed the costs of current production, the product
should be processed further.
d. If the revenues generated by processing the product further exceed the revenues
from selling the product “as is”, the company should process further.

_______46. The decision to keep or drop products or services involves a strategic consideration of the:
a. Potential impact on remaining products or services.
b. Impact on employee morale.
c. Growth potential of the firm.
d. All of the given choices.

_______47. Uranus Company has two products that use the same manufacturing facilities and cannot
be subcontracted. Each product has sufficient orders to utilize the manufacturing capacity.
For short-run profit maximization, Uranus should manufacture the product with the:
a. Lower total manufacturing costs for the manufacturing capacity.
b. Lower total variable manufacturing costs for the manufacturing capacity.
c. Greater contribution margin per hour of manufacturing capacity.
d. Greater gross profit per hour of manufacturing capacity.

_______48. A product mix decision involves:

a. Producing the maximum amount of items that provide the highest contribution
margin.
b. Influencing the sales volume mix of the products to minimize cost.
c. Producing the maximum amount of items that carry the lower per unit cost.
d. Influencing the sales volume mix of the products to maximize cost.

_______49. As long as it marginal cost is lower than its marginal revenue, a company should:
a. Suspend additional production and sales activities.
b. Perform a cost-benefit balance analysis before producing and selling additional
products.
c. Engage in additional production and sales activities.
d. Examine cost behaviors and develop a cost function to measure the cost of future
production.

_______50. Differential analysis focuses mostly focuses on which of the following?

a. Opportunity costs.
b. Accrual accounting.
c. Cash outflows.
d. Cash outflows and inflows.

_______51. Which of the following is the most relevant to a manufacturing equipment-replacement

decision?
a. Original cost of the old equipment.
b. Disposal price of the old equipment.
c. Gain or loss on the disposal price of the old equipment.
d. A lump sum write-off amount from the disposal of the old equipment.

_______52. Total unit costs:

 a. Relevant for cost volume profit analysis.
b. Irrelevant in marginal analysis.
c. Independent of the cost system used to generate them.
d. Needed for determining product contribution.
_______53. In a manufacturing environment, the best short-term profit maximizing approach is to:
a. Maximize unit gross profit times the number of units sold.
b. Minimize variable costs per unit times the number of units produced.
c. Maximize contribution per unit times the number of units sold.
d. Minimize fixed overhead cost per unit produced at full capacity.

_______54. Idle capacity in the interim will generate short-term benefit in accepting sales at price that:
a. Positively motivate employees.
b. Result in less than normal contribution margin.
c. Increase total fixed costs.
d. Reduce the overall operating income to sales ratio.

_______55. When only manufacturing costs are taken into account for special order pricing, an
essential assumption is that:
a. Acceptance of the order will not affect regular sales.
b. Acceptance of the order will not cause unit selling and administrative variable costs
to increase.
c. Manufacturing fixed and variable costs are linear.
d. Selling and administrative fixed and variable costs are linear.

_______56. The Mark X Corporation contemplates the temporary shutdown of its plant facilities in a
provincial area which are economically depressed due to natural disasters. Which of the
following expenses would continue during the shutdown period?
a. Depreciation and sales commission.
b. Property tax and interest expense.
c. Delivery expense and insurance costs.
d. Delivery and sales commission.

_______57. S. Kent Company has a limited number of machine hours that it can use for manufacturing
two products, A and B. Each product has a selling price of P160 per unit of product but A
has a 40% contribution margin ratio and product B has a 70% contribution margin ratio.
One unit of B takes twice as much as many machine hours to make as a unit of A. Assume
either can be sold in whatever quantity is produced, which product (s) should the limited
number of machine hours be used for?
a. A.
b. Both A and B.
c. B.
d. Either A or B.

_______58. Product A has a contribution margin of P80.00 per unit, a contribution margin ratio of 50%
and requires 4 machine hours to produce. Product B has a contribution margin of P120.00
per unit, a contribution margin ratio of 40% and requires 5 machine hours to produce. If the
company has unlimited machine hours available, then it should produce and sell:
a. Product A since it requires fewer machine hours per unit than Product B.
b. Product B since it has the higher contribution margin per machine hour.
c. Product A since it has the higher contribution margin per machine hour.
d. Product B since it has the higher contribution margin per unit.

_______59. Which of the following cost allocation methods is used to determine the lowest price that
can be quoted for special order that will use idle capacity within a production area?
a. Variable.
b. Job order.
c. Process.
d. Standard.

_______60. In the manufacturing process of Drigo Company, an output called substance “Pooz” is
disposed of as a waste. Recently, the Research Department has discovered a process to
convert this waste to detergent. Which of the following cost data is irrelevant to the decision
to dispose or sell “Pooz” as detergent?
a. Joint production cost of P200,000.
b. Additional processing cost will be P6.00 per liter.
c. Selling price of the new detergent is P14.00 per liter.
d. None of the above.
_______61. A product should be dropped if:
a. It has a negative incremental profit.
b. Has a negative contribution margin.
c. Dropping it will increase the total profit of the company.
d. It is not essential to the company's product line.

_______62. From its refining process an oil company obtains three products, one of which can be
processed further into a different product, the other two of which can be sold after further
refining. The refining process is:
a. A joint process.
b. A mixed cost process.
c. An unavoidable process.
d. A process whose costs should be allocated to the resulting products.

_______63. Escanaba Company has 200 units of an obsolete component. The variable cost to produce
them was P10 per unit. They could now be sold for P1.75 each and it would cost P7.60 to
make them now. If the units could be used to make a product for a special order, their
relevant cost is:
a. P1.75.
b. P7.60.
c. P10.00.
d. Some other number.

_______64. Which of the following is not relevant to a decision about whether to drop a segment?
a. The contribution margin expected to be produced by the segment.
b. The avoidable fixed costs direct to that segment.
c. The complementary effects of dropping the segment.
d. None of the above.

_______65. Which of the following is not a short-term decision?

a. Accept a special order.
b. Make-or-buy a component.
c. Replace a machine.
d. Sell a joint product at split-off or process it further.

_______66. The most profitable use of a resource that has limited capacity and is needed in the
production of more than one product is a function of which of the following?
a. The number of units of each product the company can sell.
b. The contribution margin of each product.
c. The amount of resource-use required for each unit of each product.
d. All of the above.

_______67. Which of the following is not relevant in a make-or-buy decision about a part the entity uses
in some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier's per-unit variable cost to make the part.
d. The number of units of the part needed each period.

_______68. The total demand for Product Z is relevant to a decision about:

a. The best use of a resource that is in limited supply and is used in the
production of Product Z and one other of the company's products.
b. Whether to sell Product Z, a joint product, at split-off or process it further
into another salable product.
c. Replacing Product Z with another product.
d. All of the above.

_______69. Which of the following statements is false?

a. The salary or wage that you could be earning while you are taking this test is an
opportunity cost.
b. Allocated costs are generally common.
c. Making is the correct decision when there is idle capacity.
d. A major factor in evaluating a special order is the availability of capacity to produce
the additional units.

_______70. Which of the following statements is true?

 a. A common cost relates to a process that produces more than one product.
b. Differential costs are costs that are avoidable under one alternative and
also on the other.
c. Variable costs are the only relevant costs under a make or buy decision.
d. Bygones are bygones” summarizes the role of opportunity cost in decision
making.

_______71. Determining which products should be produced when the plant is operating at full capacity
is referred to as:
a. An outsourcing analysis.
b. Production scheduling analysis.
c. A product-mix decision.
d. A short-run focus decision.

_______72. Constraints may include

a. The availability of direct materials in manufacturing.
b. Linear square feet of display space for a retailer.
c. Direct labor in the service industry.
d. All of the above.

_______73. Product mix decisions:

a. Have a long-run focus.
b. Help determine how to maximize operating profits.
c. Focus on selling price per unit.
d. All of the above.

_______74. Which For determining the best mix of products, the one with the least amount of influence
is
a. The market price of the products.
b. Corporate office costs allocated to each product.
c. The use of capacity resources.
d. Contribution margins.

_______75. In product-mix decisions,

a. Always focus on maximizing total contribution margin.
b. Focus on the product with the greatest contribution margin per machine-hour.
c. Focus on the full costs of the product.
d. Never focus on the short-term, but include only long-term considerations.

“The power to move the world lies on the choices you make.”
Anonymous