Question 1

The term "opportunity cost" is best defined as the benefit associated with a rejected alternative when making a choice.

Accepted Answer

This is the correct definition of opportunity cost – the value of the next best alternative that must be given up in order to pursue a certain action or decision.

Question 2

Which of the following costs can be ignored when making a decision?
A) Opportunity costs.
B) Differential costs.
C) Sunk costs.
D) Relevant costs.
E) All future costs.

Accepted Answer

Sunk costs are past costs that cannot be changed no matter what decision is made in the future. Therefore, they should not be considered when making a decision.

Question 3

A trade-off in a decision situation sometimes occurs between information:
A) accuracy and relevance.
B) relevance and uniqueness.
C) accuracy and timeliness.
D) sensitivity and accuracy.
E) sensitivity and relevance.

Accepted Answer

In a decision situation, one may have to choose between accuracy and timeliness of information. This is because it may take more time to gather accurate information, but waiting too long may result in missing an opportunity or making a decision that is no longer relevant. Therefore, a trade-off between accuracy and timeliness of information may need to be considered.

Question 4

An accounting information system should be designed to provide information that is useful. To be useful the information must be:
A) qualitative rather than quantitative.
B) unique and unavailable through other sources.
C) historical in nature and not purport to predict the future.
D) marginal between two alternatives.
E) relevant, accurate, and timely.

Accepted Answer

Relevant information needs to pertain to the user's needs and goals, accurate information should be free from errors or biases, and timely information should be available in time to inform decisions. Quantitative vs qualitative and historical vs future-oriented are not the key criteria for useful information. Marginal information can still inform decisions but it is not the most critical aspect of usefulness. Uniqueness is also not a determining factor in usefulness.

Question 5

Managerial accountants:
A) rarely become involved in an organization's decision-making activities.
B) make decisions that focus solely on an organization's accounting matters.
C) collect data and provide information so that decisions can be made.
D) often serve as a cross-functional team member, making a wide range of decisions.
E) collect data and provide information so that decisions can be made and often serve as a cross-functional team member, making a wide range of decisions.

Accepted Answer

Managerial accountants collect data and provide information so that decisions can be made. Additionally, they often serve as a cross-functional team member, making a wide range of decisions. This is because their role is to provide financial information and insights to various departments within an organization, helping them make informed decisions that impact the company's overall strategy and profitability.

Question 6

Factors in a decision problem that cannot be expressed in numerical terms are:
A) qualitative in nature.
B) quantitative in nature.
C) predictive in nature.
D) sensitive in nature.
E) uncertain in nature.

Accepted Answer

Factors that cannot be expressed in numerical terms are usually qualitative in nature, meaning they are based on qualities or characteristics that cannot be measured or quantified. Examples could include personal values, emotions, opinions, or beliefs.

Question 7

To be useful in decision making, information should possess which of the following characteristics? $$\begin{array} { l l l l l } 
& \text { Relevance } & \text { Accuracy } & \text { Timeliness } \
\hline  \text { A. } & \text { Yes } & \text { No } & \text { Yes } \
\text { B. } & \text { Yes } & \text { Yes } & \text { No } \
\text { C. } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { D. } & \text { No } & \text { Yes } & \text { Yes } \
\text { E. } & \text { No } & \text { No } & \text { Yes }
\end{array}$$
A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Accepted Answer

For information to be useful in decision making, it should be relevant, accurate, and timely.

Question 8

At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact?
A) Specifying the criterion and identifying the alternatives.
B) Developing a decision model.
C) Collecting the data.
D) Making a decision.
E) Identifying the alternatives.

Accepted Answer

The answer of At which step or steps in the...

Question 9

A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company has capacity constraints in the form of limited resources.

Accepted Answer

Emphasizing goods with the highest contribution margin per unit may not be the best decision when the company has limited resources because other products with lower contribution margins may have a higher demand and thus generate more revenue overall. The firm should consider the opportunity cost of producing goods with higher contribution margins when there are other products that could generate more revenue with the same resources.

Question 10

The City of Columbus should not consider the purchase price of its old vehicle when making the decision to replace it with a more cost effective new vehicle.

Accepted Answer

The answer of The City of Columbus should not consider...

Question 11

The cost of inventory currently owned by a company is an example of a (n):
A) opportunity cost.
B) sunk cost.
C) relevant cost.
D) differential cost.
E) future cost.

Accepted Answer

Sunk costs are past costs that have already been incurred and cannot be recovered. The cost of inventory currently owned by a company is considered a sunk cost because it represents money that has already been spent and cannot be recovered, regardless of future actions.

Question 12

The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?
A) Purchase price of the new vehicle.
B) Purchase price of the old vehicle.
C) Savings in operating costs as a result of the new vehicle.
D) Proceeds from disposal of the old vehicle.
E) Future depreciation on the new vehicle.

Accepted Answer

The purchase price of the old vehicle would not be considered in the decision, as it is a sunk cost and cannot be recovered. The focus would be on the purchase price of the new vehicle, the savings in operating costs, the proceeds from disposal of the old vehicle, and future depreciation on the new vehicle, as those items are relevant to the decision-making process.

Question 13

The book value of equipment currently owned by a company is an example of a (n):
A) future cost.
B) differential cost.
C) comparative cost.
D) opportunity cost.
E) sunk cost.

Accepted Answer

The book value of equipment is an example of a sunk cost, which is a cost that has already been incurred and cannot be recovered, regardless of future decisions. Therefore, it is not relevant to future decision-making processes.

Question 14

Which of the following best defines the concept of a relevant cost?
A) A past cost that is the same among alternatives.
B) A past cost that differs among alternatives.
C) A future cost that is the same among alternatives.
D) A future cost that differs among alternatives.
E) A cost that is based on past experience.

Accepted Answer

A relevant cost is a cost that differs among alternatives and is important in making a particular decision. It is a future cost that is expected to be incurred and is relevant in the decision-making process. Option A is incorrect because a past cost that is the same among alternatives is not a relevant cost since it does not affect the decision-making process. Option B is also incorrect since a past cost is not relevant unless it differs among alternatives. Option C is incorrect because a future cost that is the same among alternatives does not affect the decision-making process. Option E is incorrect because a cost based on past experience may not be relevant since the decision is based on future costs that will be incurred.

Question 15

The following costs are relevant to the decision situation cited except:
A) the cost of hiring a full-time staff attorney, in a decision to establish an in-house legal department or retain the services of a prominent law firm.
B) the remodeling cost of existing office space, in a firm's decision to stay at its current location or move to a new building.
C) the long-term salary costs demanded by Joe Torrez (a superstar) and Rip Moran (an average player) in baseball contract negotiations, in a decision that determines the amounts by which ticket prices must be raised.
D) the cost to enhance an airline's Web site, in a decision to expand existing service to either Salt Lake City or Phoenix.
E) the commissions that could be earned by a salesperson, in a decision that involves salesperson compensation methods (i.e., commissions or flat monthly salaries).

Accepted Answer

The answer of The following costs are relevant to the...

Question 16

The concept of a relevant cost can be defined as a past cost that differs among alternatives.

Accepted Answer

The concept of a relevant cost refers to a cost that is expected to change in the future and differs among alternatives. Past costs, also known as sunk costs, are not relevant in decision making as they cannot be changed or recovered.

Question 17

Allegiance, Inc. has $125,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There the goods could be sold for $80,000. What alternative is more desirable and what is the relevant cost for that alternative?
A) Sell "as is," $125,000.
B) Clean and ship to outlet center, $23,000.
C) Clean and ship to outlet center, $103,000.
D) Clean and ship to outlet center, $148,000.
E) Neither alternative is desirable, as both produce a loss for the firm.

Accepted Answer

Selling "as is" would only generate a revenue of $45,000, which is much lower than the cost of cleaning and shipping the goods to the outlet center. Therefore, the company should choose to clean and ship the goods to the outlet center.

The relevant cost for this alternative is the total cost of cleaning and shipping, which is $23,000. Adding this cost to the initial inventory value of $125,000, the total cost of the alternative becomes $148,000.

Selling the goods at the outlet center for $80,000 generates a revenue of $57,000 ($80,000 - $23,000), which is higher than the revenue generated by selling "as is". Therefore, the best choice for the company is to clean and ship the goods to the outlet center.

Question 18

Flowers Company is operating at capacity and wants to add a new service to its expanding business. The new service should be added as long as service revenues exceed the sum of variable costs and fixed costs.

Accepted Answer

A new service should be added if the service revenues exceed the variable costs, as fixed costs are already covered by existing operations.

Question 19

In early July, Mike Gottfried purchased a $70 ticket to the December 15 game of the Chicago Titans. (The Titans belong to the Midwest Football League and play their games outdoors on the shore of Lake Michigan.) Parking for the game was expected to cost approximately $22, and Gottfried would probably spend another $15 for a souvenir program and food. It is now December 14. The Titans were having a miserable season and the temperature was expected to peak at 5 degrees on game day. Mike therefore decided to skip the game and took his wife to the movies, with tickets and dinner costing $50. The sunk cost associated with this decision situation is:
A) $20.
B) $50.
C) $70.
D) $107.
E) None of the other answers are correct.

Accepted Answer

The sunk cost is the $70 ticket price, as it is a past expense that cannot be recovered regardless of the decision made.

Question 20

Consider the following costs and decision-making situations:
I. The cost of existing inventory, in a keep vs. disposal decision.
II. The cost of special electrical wiring, in an equipment acquisition decision.
III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision.
Which of the above costs is (are) relevant to the decision situation noted?
A) I only.
B) II only.
C) III only.
D) I and II.
E) II and III.

Accepted Answer

The cost of special electrical wiring in an equipment acquisition decision is relevant because it is a future cost that will differ between alternatives. The cost of existing inventory (sunk cost) and the salary of a supervisor who will be transferred (no additional cost) are not relevant to the decisions noted.

Quiz 14: Decision Making: Relevant Costs and Benefits

The term "opportunity cost" is best defined as the benefit associated with a rejected alternative when making a choice.

Which of the following costs can be ignored when making a decision?

A trade-off in a decision situation sometimes occurs between information:

An accounting information system should be designed to provide information that is useful. To be useful the information must be:

Managerial accountants:

Factors in a decision problem that cannot be expressed in numerical terms are:

At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact?

A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company has capacity constraints in the form of limited resources.

The City of Columbus should not consider the purchase price of its old vehicle when making the decision to replace it with a more cost effective new vehicle.

The cost of inventory currently owned by a company is an example of a (n) :

The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?

The book value of equipment currently owned by a company is an example of a (n) :

Which of the following best defines the concept of a relevant cost?

The following costs are relevant to the decision situation cited except:

The concept of a relevant cost can be defined as a past cost that differs among alternatives.

Flowers Company is operating at capacity and wants to add a new service to its expanding business. The new service should be added as long as service revenues exceed the sum of variable costs and fixed costs.