Question 1

Common costs are not directly traceable to an individual product line.

Accepted Answer

Common costs are costs that cannot be traced to a specific product or department, such as rent, utilities, and salaries of top-level executives.

Question 2

Sunk costs are incremental costs because they increase or decrease with the choice of one alternative over another.

Accepted Answer

Sunk costs are not incremental costs as they are costs that have already been incurred and cannot be recovered, regardless of the choice of one alternative over another.

Question 3

In deciding whether to sell or process further, the costs that have been incurred to process the product to the split-off point are incremental costs.

Accepted Answer

The costs incurred up to the split-off point are sunk costs, not incremental costs. Incremental costs are the additional costs incurred to process the product further beyond the split-off point.

Question 4

Two or more products which result from common inputs are called cut-off products.

Accepted Answer

Two or more products resulting from common inputs are called joint products, not cut-off products. Joint products are generated simultaneously in a certain production process from the same raw materials.

Question 5

In a make-or-buy decision, direct materials and direct labor are usually incremental costs.

Accepted Answer

Direct materials and direct labor are costs that are directly tied to the production process and incurred only if the company decides to make the product in-house. These costs are considered incremental because they will only be incurred if the company chooses to make the product, and therefore need to be considered in the make-or-buy decision-making process.

Question 6

The stage of production at which individual products are identifiable is referred to as the spin-off point.

Accepted Answer

The stage of production at which individual products are identifiable is referred to as the split-off point, not the spin-off point.

Question 7

In a make-or-buy decision, the original purchase price of equipment that is currently used in the manufacturing process is usually a relevant cost because the equipment can be sold for its salvage value.

Accepted Answer

The original purchase price of equipment is a sunk cost and not relevant to future decisions such as make-or-buy decisions. Only future costs and benefits, like potential salvage value, are relevant.

Question 8

The proper way to analyze the decision to drop a product line is to compare sunk costs to incremental costs.

Accepted Answer

The proper way to analyze the decision to drop a product line is to compare future costs and benefits, not sunk costs to incremental costs. Sunk costs are irrelevant in this decision because they are costs that have already been incurred and cannot be recovered. The focus should be on the incremental costs and benefits that would result from dropping the product line.

Question 9

Allocating joint costs to products based on physical quantities will make all of the products have the same gross margin ratio if they are sold at the split-off point.

Accepted Answer

Allocating joint costs to products based on physical quantities does not necessarily make all of the products have the same gross margin ratio, even if they are sold at the split-off point. This is because different products may have different selling prices and production costs, which can affect their gross margin ratio.

Question 10

If a company decides to eliminate a product, fixed costs allocated to that product line will be avoided.

Accepted Answer

Fixed costs are incurred regardless of the level of production or sales, so eliminating a product line does not avoid these costs. They are typically only avoided if the company shuts down operations entirely or sells off the part of the business associated with those fixed costs.

Question 11

Avoidable costs are always relevant.

Accepted Answer

Avoidable costs are costs that can be eliminated or reduced by taking a particular decision. As such, they are relevant in decision-making as they impact the final outcome.

Question 12

Differential costs are relevant in decision-making.

Accepted Answer

Differential costs are costs that vary between alternatives and therefore are relevant in making decisions between those alternatives.

Question 13

The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.

Accepted Answer

The best way to allocate the cost of common inputs to joint products is typically based on the relative sales value of the outputs, not the physical quantities, because this method reflects the economic value contributed by each joint product to the total revenue.

Question 14

Decision alternatives that provide the largest incremental profit are always the best option.

Accepted Answer

While incremental profit is an important factor to consider when making a decision, there are other factors such as ethical considerations, long-term impact, and brand reputation that should also be considered. Therefore, it is not always the case that the option with the largest incremental profit is the best choice.

Question 15

Fixed costs are always sunk costs.

Accepted Answer

Fixed costs are not always sunk costs. Fixed costs are expenses that do not change with the level of production or sales, such as rent or salaries. Sunk costs are costs that have already been incurred and cannot be recovered. While some fixed costs can be sunk costs if they have already been paid and cannot be recovered, not all fixed costs are sunk, as some may be avoidable or recoverable in the future.

Question 16

Opportunity costs represent the benefits foregone by selecting one alternative over another.

Accepted Answer

Opportunity costs refer to the benefits that are lost or foregone when choosing one option over another.

Question 17

When deciding whether to eliminate a segment, the segment should be dropped if its contribution margin less the avoidable fixed costs is positive.

Accepted Answer

A segment should be considered for elimination if its contribution margin is less than its avoidable fixed costs, not the other way around. If the contribution margin less the avoidable fixed costs is positive, it means the segment is still contributing positively to covering the company's overall fixed costs and profit.

Question 18

Avoidable fixed costs are incremental in a make-or-buy decision.

Accepted Answer

Avoidable fixed costs are costs that can be eliminated if a particular activity is discontinued or if a particular decision is not made. In a make-or-buy decision, these costs are incremental and should be considered when making the decision.

Question 19

Avoidable costs are always incremental to business decisions.

Accepted Answer

Avoidable costs refer to costs that can be eliminated or avoided if a particular business decision is not taken. Therefore, they are always incremental or additional to the costs that would have been incurred anyway.

Question 20

Incremental profit is the additional revenue received as a result of selecting one decision alternative over another.

Accepted Answer

Incremental profit is the additional profit received as a result of selecting one decision alternative over another, not just the additional revenue. It considers both the additional revenue and the additional costs associated with the decision.

Quiz 7: The Use of Cost Information in Management Decision Making