Deck 17: Accounting for Decision-Making: When There Are No Resource Constraints

Question 1

Differential (incremental) costs are the expenses that are incurred if something goes wrong.

Answer 1

False

Question 2

Where a resource was originally purchased for some purpose other than an opportunity currently under consideration, the relevant cost of using that resource is its replacement costs.

Answer 2

True

Question 3

Sunk costs can easily be identified in that they will have been paid for or they are owed under a legal binding contract. The firm is committed to paying for them in the future.

Answer 3

True

Question 4

Priddy Products Limited manufactures an industrial grade floor polish which it sells in 10kg tubs. Each tub sells for £32.50. Direct materials per tub cost £4.40 and direct labour costs £3.50. Factory production overhead is recovered on the basis of direct labour hours. Each tub of product requires 20 minutes of direct labour input, and the recovery rate per labour hour is £31.74. What is the contribution per tub of polish?

A) £ 25.67
B) £ 24.60
C) £18.60
D) £34.00

Question 5

It may be that a product makes a loss after overhead costs have been absorbed into the product. This does not mean the product should be dropped.

Question 6

Marginal costing is useful for which important management accounting function?

A) Planning
B) Decision Making
C) Control D Budgeting

Question 7

A relevant cost is a future variable cost.

Question 8

Last year ABC Ltd sold 5000 units generating sales revenue of £50000. The total variable costs were £25000 and the fixed costs were £10000. The company has recognized that fixed costs will rise next year by £5000. If the company wanted to make the same amount of profit next year how many units would have to be sold.

A)1000
B)2000
C)1500
D)950

Question 9

Which of the following statements is correct? In economics, a marginal cost is:

A) The cost of producing one additional item
B) The amount of profit that can be made by incurring the cost of one additional item
C) Total costs divided by total items produced
D) Fixed costs divided by target profit

Question 10

Lindsay Fabrications Limited produces the YT32, which has the following costs: £ per unit Direct materials 16.00 Direct labour 14.00 Factory production overhead is recovered on the basis of machine hours. Each YT32 requires an input of 1.5 machine hours. The recovery rate per hour is £11.50. The selling price of the YT32 is £62.50 per unit. What is the contribution per unit of YT32? A.

A) £32.50
B) £25.50
C) £8.25
D) £14.00

Question 11

The time period over which the relationship between the fixed and variable costs may hold good is difficult to determine.

Question 12

An opportunity cost of a resource is normally defined as the maximum benefit which could be obtained from the resource if it were used for some alternative purposes.

Question 13

Southend Ltd manufactures wheelie bins, each of which sells for £65.50. Variable labour costs of manufacture are £7.50 and variable raw materials costs are £6.25 per bin. Fixed costs for the 20X1 financial year are budgeted at £342000 and the directors have set a target profit figure for the year of £150000. How many wheelie bins must the company sell in 20X1 in order to reach the target profit (to the nearest whole unit)?

A) 9875
B) 8768
C) 9507
D) 7887

Question 14

A company is proposing to expand its productive capacity by a significant amount. What is the decision rule that should be applied by the directors in deciding whether or not to accept the expansion proposal? Accept the project if:

A) Its incremental revenue exceeds incremental costs
B) Incremental revenue exceeds incremental fixed costs
C) Incremental fixed costs do not exceed variable costs
D) Incremental fixed costs plus incremental variable costs exceed incremental revenue

Question 15

Which of the following statements about contribution are correct? (i) If contribution is a positive figure it contributes, first, to covering fixed costs, and second, to profit. (ii) In order to calculate contribution it is necessary first to split costs into fixed and variable.

A) (i) only
B) Both of them
C) (ii) only
D) Neither of them

Question 16

The labour requirements for a special contract are 250 skilled labour hours paid at £10 per hour and 750 semi skilled hours paid £8 per hour. At present, skilled labour is in short supply, and all such labour used on this contract will be at the expense of other work which generates £12 contribution per hour (after charging labour costs) There is currently a surfeit of 1200 semi skilled labour hours , but the firm temporarily has a policy of no redundancies. The relevant cost of labour for the special contract is:

A) £3000
B) £5500
C) £8500
D) £11500

Question 17

Avoidable costs are relevant costs.

Question 18

Fixed cost will always be irrelevant costs.

Question 19

Of the following statements about marginal costing which one or both are correct? Marginal costing: (i) Provides a sounder basis for decision-making than absorption costing (ii) Can be used only in businesses that incur variable costs

A) (i) only
B) (ii) only
C) Neither of them
D) Both of them

Question 20

The following is the budgeted income and expenditure for the month of March 20X1 for Wren Ltd: £ Sales: 1500 units at £20 each 30000 Costs Direct materials and labour (12000) Production overhead (all fixed) absorbed at £1.50 per unit (4 500) Selling and administrative overhead (all fixed) (1 500) Net profit 12000 What would be the cost of producing one further unit of product?

A) £8
B) £7
C) £9
D) £10