Chapter 13 Relevant Costs for Decision Making

True/False Questions

1. Sunk costs are costs that have proven to be
unproductive.

2. All costs are avoidable in a decision except
sunk costs and future costs that do not differ between the alternatives at
hand.

3. Consistency demands that a cost that is
relevant in one decision be regarded as relevant in other decisions as well.

4. A cost may be relevant for one decision
making situation but irrelevant for another situation.

5. A future cost that does not vary among
alternatives under consideration is irrelevant.

6. Opportunity costs represent economic benefits
that are forgone as a result of pursuing some course of action.

7. An existing asset should not be replaced until
its original cost has been fully recovered.

8. Fixed costs are irrelevant in decisions about
whether a product line should be dropped.

9. In a special order situation, any fixed cost
associated with the order would be irrelevant.

10. When a company has a production constraint,
total contribution margin will be maximized by emphasizing the products with
the highest contribution margin per unit of the constrained resource.

11. Eliminating nonproductive time is particularly
important in a bottleneck operation.

12. One way to increase the effective utilization
of a bottleneck is to reduce the number of defective units.

13. As a general guide, it is profitable to
continue processing joint products after the split-off point if their total
revenues exceed the joint costs.

14. Joint costs are irrelevant in the decision of
whether to sell a joint product at the split-off point or process it further
and then sell it.

15. A key advantage of using activity-based
costing is that any cost that is assigned to a product is also a relevant cost
in any decision involving that product.

Multiple
Choice Questions

16. Costs which can be eliminated in whole or in
part if a particular business segment is discontinued are called:
A) sunk costs.
B) opportunity costs.
C) avoidable costs.
D) irrelevant costs.

17. Consider the following statements:

I.
Assemble all costs associated
with each alternative being considered.
II.
Eliminate those costs that are
sunk.
III.Eliminate those costs that differ between alternatives.

Which of the above
statements does not represent a step in identifying the relevant costs in a
decision problem?
A) Only I
B) Only II
C) Only III
D) Only I and III

18. Which of the following cash flows is relevant
in a decision about accepting Alternative X or Alternative Y?
A) a cash inflow for Alternative X that is
not a cash inflow for Alternative Y.
B) a cash inflow that is lost if Alternative
X is accepted and is not lost if Alternative Y is accepted.
C) a cash outflow that is avoided if
Alternative X is accepted and is not avoided if Alternative Y is accepted.
D) all of the above.

19. Which of the following best describes an
opportunity cost:
A) it is a relevant cost in decision making,
but is not part of the traditional accounting records.
B) it is not a relevant cost in decision
making, but is part of the traditional accounting records.
C) it is a relevant cost in decision making,
and is part of the traditional accounting records.
D) it is not a relevant cost in decision
making, and is not part of the traditional accounting records.

20. Consider the following statements:

I.
A division’s net operating
income, after deducting both traceable and allocated common corporate costs, is
negative.
II.
The division’s avoidable fixed
costs exceed its contribution margin.
III.The division’s traceable fixed costs plus its allocated common
corporate costs exceed its contribution margin.

Which of the above
statements give an economic reason for eliminating the division?
A) Only I
B) Only II
C) Only III
D) Only I and II