Question 1

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based upon normal levels of performance.

Accepted Answer

This is because the cost-plus approach adds a markup to the estimated costs to determine the selling price. If the estimates are based on abnormal or overly optimistic levels of performance, the markup may not adequately cover all costs and result in lower profitability or even losses for the company.

Question 2

In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Accepted Answer

In product cost concept, the cost-plus approach includes adding markup that covers selling expenses, administrative expenses, and profit to the actual cost of the product.

Question 3

Make-or-buy decisions should be made only with related parties.

Accepted Answer

Make-or-buy decisions should be made after considering options from both related and unrelated parties. The decision should be based on various factors such as cost, quality, expertise, etc.

Question 4

The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost concept includes all manufacturing costs, such as direct materials, direct labor, and manufacturing overhead, in the cost amount. The markup is then added to this cost amount to determine the product price.

Question 5

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Accepted Answer

Cost-plus methods use a cost amount per unit and add a markup to determine the normal selling price.

Question 6

The lowest contribution margin per scarce resource is the most profitable.

Accepted Answer

The statement is false. The highest contribution margin per scarce resource is the most profitable. This is because the scarce resource limits the quantity of product that can be produced and sold. Therefore, maximizing the contribution margin per unit of scarce resource will result in the highest profit.

Question 7

A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach.

Accepted Answer

The cost-plus approach is a common method used by managers to determine the price of a product or service by calculating the total cost of production and then adding a markup to cover overhead expenses and generate a profit. This approach is based on the assumption that the price should cover the cost of production and provide a reasonable margin of profit.

Question 8

When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour.

Accepted Answer

This statement is true. By manufacturing the product with the highest contribution margin per bottleneck hour, the company can maximize its profits and make the most effective use of its limited resources.

Question 9

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup.

Accepted Answer

In the variable cost concept of cost-plus pricing, only variable costs are considered in setting the price, and the markup is added to cover fixed costs and desired profit, not including fixed manufacturing costs and fixed selling and administrative expenses in the cost base.

Question 10

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Accepted Answer

Discontinuing a segment or product that contributes to fixed expenses may lead to a reduction in overall revenue and may not necessarily result in cost savings. It is important to carefully evaluate the impact of such a decision on overall profitability before discontinuing a segment or product.

Question 11

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based upon ideal levels of performance.

Accepted Answer

Estimated costs should be based on expected levels of performance, not ideal levels. Ideal levels of performance may not be achievable, resulting in unrealistic cost estimates and potentially unprofitable product pricing.

Question 12

The product cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost concept includes all manufacturing costs (direct materials, direct labor, and manufacturing overhead) but does not include selling and administrative expenses; these are considered period costs and are not included in the calculation of the product cost.

Question 13

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process.

Accepted Answer

The theory of constraints (TOC) is a production philosophy developed by Eliyahu M. Goldratt that is based on the principle that the performance of a system is limited by its constraints. The goal of TOC is to identify and manage those constraints in a way that maximizes the overall output of the system. By reducing the impact of bottlenecks, or constraints, on the process, the production can be improved.

Question 14

Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing.

Accepted Answer

This statement is true. Depending on the demand and market for the product, it may be more profitable for a company to process only a portion of it and leave the rest in its original state.

Question 15

When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

Accepted Answer

Not necessarily. There may be reasons to keep the segment, such as strategic positioning, potential growth, or supporting other parts of the company. A thorough analysis of the cause of the losses and potential solutions should be conducted before making a decision to discontinue the segment.

Question 16

Activity-based costing provides more accurate and useful cost data than traditional systems.

Accepted Answer

Activity-based costing (ABC) is a more accurate and useful method of costing than traditional systems as it focuses on the activities required to produce a product or service and allocates costs based on the resources each activity consumes. This results in more accurate cost data which can be used for decision making and cost management purposes. Traditional methods, on the other hand, tend to rely on simple cost drivers like direct labor hours, which may not provide an accurate picture of the actual costs involved.

Question 17

A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour.

Accepted Answer

The maximum capacity of the machinery is 1,000 units per hour while the demand is 1,200 units per hour, creating a bottleneck where the machinery cannot keep up with the demand.

Question 18

Activity-based costing is determined by charging products for only the services (activities) they used during production.

Accepted Answer

Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services based on their actual consumption. This means that products are charged only for the activities they used during production.

Question 19

In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.

Accepted Answer

The answer of In using the variable cost concept of...

Question 20

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Accepted Answer

When demand exceeds production capacity, it creates a bottleneck in the production process.

Quiz 10: Differential Analysis and Product Pricing