Question 1

An outlay cost is a cost that requires a cash disbursement.

Accepted Answer

Outlay costs are costs that require the expenditure of cash. They involve an actual disbursement of money, unlike non-outlay costs which may not necessarily require cash payment.

Question 2

All fixed costs are irrelevant and only variable costs are relevant to the decision-making process.

Accepted Answer

Both fixed and variable costs can be relevant in decision-making. Fixed costs can impact the breakeven point and overall profitability of a project or product, while variable costs directly impact the cost per unit or cost of goods sold. Therefore, it is important to consider both fixed and variable costs when making decisions.

Question 3

Make-or-buy decisions can apply to services as well as to products.

Accepted Answer

Make-or-buy decisions can apply to both services and products. The decision involves choosing whether to produce a product or service in-house or buy it from an external supplier. This choice determines whether an organization should invest in its resources to produce the product or service or outsource it to a specialized vendor.

Question 4

In a sell or process further decision, joint costs must be analyzed to determine maximum profitability.

Accepted Answer

Joint costs are sunk costs and should not be considered when making sell or process further decisions; only incremental costs and revenues should be analyzed.

Question 5

Managers are often motivated to reject desirable economic decisions because of a conflict between the measures used in decision making and those used in performance evaluation.

Accepted Answer

Managers may reject desirable economic decisions if they perceive that these decisions will adversely affect their performance evaluation. This conflict often arises when the metrics used to evaluate a manager's performance, such as profit margins or return on investment, do not align with the long-term goals of the company, such as investing in research and development or expanding into new markets. When managers prioritize their own short-term performance goals over the long-term interests of the company, it can lead to suboptimal economic decisions.

Question 6

Unit costs not computed on the same volume basis should not be compared.

Accepted Answer

Comparing unit costs that are not computed on the same volume basis would be inaccurate because the difference in volume would impact the overall cost. Therefore, it is important to ensure that unit costs are computed on the same volume basis before making any comparisons.

Question 7

Amortization on old or new equipment is irrelevant information.

Accepted Answer

Amortization on equipment is relevant information for accounting purposes. It affects the company's financial statements, tax liabilities, and overall profitability.

Question 8

A homeowner has paid off the mortgage on his house and continues to live in the house. The interest income foregone by NOT selling the house and investing the proceeds is an example of a(n)
A) sunk cost.
B) detrimental cost.
C) opportunity cost.
D) outlay cost.

Accepted Answer

The interest income foregone by not selling the house and investing the proceeds is an example of opportunity cost. Opportunity cost refers to the cost of forgoing the next best alternative. In this case, the opportunity cost is the return that the homeowner could have earned by investing the proceeds from the sale of the house. Since he has chosen to live in the house instead of selling it, he is foregoing the opportunity to earn interest income.

Question 9

A current or future action can always influence the long-run impact of a past outlay.

Accepted Answer

A past outlay, known as a sunk cost, cannot be altered by current or future actions, as it has already been incurred and cannot be recovered.

Question 10

Conflicts in the decision-making process can arise when superiors evaluate a manager's performance using a model consistent with the decision model.

Accepted Answer

Conflicts in the decision-making process often arise when there is inconsistency between the model used for evaluating a manager's performance and the decision model the manager is expected to follow. If both models are consistent, it reduces the likelihood of conflict.

Question 11

The split-off point is the juncture in manufacturing where the joint products become individually identifiable.

Accepted Answer

This is correct, the split-off point is the point in the manufacturing process where joint products split off and become individually identifiable.

Question 12

Separable costs are part of a joint process and can be exclusively identified with individual products.

Accepted Answer

Separable costs are part of a joint process but cannot be exclusively identified with individual products.

Question 13

The salary foregone by a person who quits a job to start a business is an example of a(n)
A) sunk cost.
B) opportunity cost.
C) amortizable cost.
D) outlay cost.

Accepted Answer

The salary foregone by a person who quits a job to start a business is an example of opportunity cost. This is because the decision to start the business involves giving up the opportunity to earn the salary from the previous job, which represents the next best alternative use of time and resources. Opportunity cost refers to the value of the best alternative forgone when making a decision.

Question 14

Opportunity cost is
A) the contribution of the best alternative that is excluded from consideration.
B) the same as outlay cost.
C) never relevant to a decision.
D) always an experimental cost.

Accepted Answer

Opportunity cost is the cost of the best alternative that must be given up in order to pursue a certain action or decision. Therefore, option A is the best choice as it accurately defines opportunity cost. Option B is incorrect as outlay cost refers to the actual cost spent on something, while option C is incorrect as opportunity cost is always relevant to decision-making. Option D is incorrect as experimental cost refers to the cost incurred in conducting an experiment, which is unrelated to opportunity cost.

Question 15

A cost that requires a cash disbursement is called a(n)
A) sunk cost.
B) opportunity cost.
C) outlay cost.
D) common cost.

Accepted Answer

A cost that requires a cash disbursement is referred to as an outlay cost. Sunk costs are expenditures that have already been incurred and cannot be changed or recouped, whereas opportunity costs are the cost of losing the next best alternative. Common costs are shared costs for multiple products or services.

Question 16

Opportunity cost is the maximum available contribution to profit foregone by using limited resources for a particular purpose.

Accepted Answer

This is the correct definition of opportunity cost. It is the cost of forgoing the next best alternative when making a decision to allocate resources.

Question 17

In practice, sunk costs often influence important decisions, especially when a decision maker doesn't want to admit that a previous decision was a bad decision.

Accepted Answer

This is a common behavioral bias known as the sunk cost fallacy, where individuals feel invested in a previous decision and are reluctant to let it go, even if it no longer makes rational sense. Thus, sunk costs often influence important decisions, especially when a decision maker doesn't want to admit that a previous decision was a bad decision.

Question 18

Book value is defined as the cost of a depreciable asset.

Accepted Answer

Book value is the value of an asset as recorded on the balance sheet, calculated as the original cost minus accumulated depreciation.

Question 19

Differential cost is a synonym for
A) detrimental cost.
B) opportunity cost.
C) accidental cost.
D) incremental cost.

Accepted Answer

Differential cost refers to the change in cost that occurs as a result of a specific decision, activity, or project. It is also known as incremental cost because it only considers the additional costs incurred as a result of the decision, rather than the total cost. Option A (detrimental cost) and option C (accidental cost) are not synonyms for differential cost, while option B (opportunity cost) refers to the cost of foregoing the next best alternative, and is not exactly the same as differential cost.

Question 20

Obsolete inventory costs are not relevant, because they are not an expected future cost but a past cost.

Accepted Answer

Obsolete inventory costs are already incurred and cannot be changed by future decisions. Therefore, they are not relevant for future decision-making and planning.

Quiz 9: Relevant Information and Decision Making: Production Decisions