CHAPTER 18 – MULTIPLE CHOICE (p.

783-795)

1. Cost that do not appear in accounting records and that do not require peso outlays but do involve
a forgone opportunity by the entity whose costs are being measured are:
a. Conversion Costs – are part of COGS.
b. Differential Costs
The difference between the cost of two alternative decisions. Also known as incremental
cost, it can be a fixed or variable cost. The difference in revenue of two alternatives is
known as differential revenue. Information presented in alternative decisions require cash
outlays in the near future as a decision is made.
c. Imputed Costs
The cost incurred during the period when an asset is employed for a particular use, rather
than redirecting the asset to a different use. They are hypothetical costs and are not
recorded in the books of accounts. Imputed costs and opportunity costs may be used
interchangeably.
d. Prime Costs – are part of COGS.

2. Pear Company temporarily has unused production capacity. The idle plant facilities can be used to
manufacture a low-margin item. The low-margin item should be produced if it can be sold for
more than its:
a. Fixed costs – if the low-margin item is sold for more than its fixed cost (allocated portion of
idle capacity), gross profit would decrease as variable costs is not considered.
b. Variable costs – if the low-margin item is sold for more than its variable cost, net profit
would not move (or move minimally) since profit is only enough to cover the variable cost.
The potential profit that the idle capacity can generate is disregarded.
c. Variable costs plus any opportunity cost of the idle facilities.
The potential profit that the idle facility can generate are considered plus the variable
cost of the low-margin item.
d. Indirect costs plus any opportunity cost of the idle facilities. – not variable cost considered.

3. As part of the data presented in support of a proposal to increase the production of clock-radios,
the sales manager of Whittaker Electronics reported the total additional cost required for the
proposed increased production level. The increase in total cost is known as:
a. Controllable Cost – can be altered in the short-run. Increasing production capacity is not a
short-term decision.
b. Direct Cost
Costs presented by the sales manager are costs to be incurred in increasing production
level. Thus, the costs are direct in relation to the cost object.
c. Opportunity Cost – no hypothetical situations and conditions presented in the problem.
Opportunity costs arise when the asset is used for something else rather than upgrading it.
d. Out-of-Pocket Cost – costs that refers to expenses incurred by employees that requires
reimbursement. There is direct payment of cash.

4. An item whose entire amount is usually a differential cost is:

a. Factory Overhead – can be a prime or conversion cost problem.
b. Direct Cost
Differential cost are two sets of costs in relation to a particular decision. For example,
increasing production capacity may have two alternatives. All costs in each alternative are
direct costs to the cost object. Hence, in deciding for alternatives, differential costs are all
direct costs.
c. Conversion Cost – can be a direct material problem
d. Period Cost – can be a product related problem. Period costs are mostly fixed costs.

5. In the development of accounting data for decision-making purpose, relevant costs are defined as:
a. Future costs which will differ under each alternative course of action.
b. The change in prime cost under each alternative course of action. – relevant costs are not
exclusively prime costs.
c. Standard costs which are developed by time and motion study techniques because of
their relevance to managerial control.
d. Historical costs which are the best available basis for estimating future costs. – historical
costs or sunk costs are irrelevant.
6. Which of the following costs are always irrelevant in decision making?
a. Avoidable Costs
b. Sunk Costs
Historical costs. Already incurred and not relevant.
c. Opportunity Costs
d. Fixed Costs – fixed costs in general may or may not be relevant. Depreciation is irrelevant
since it is a sunk cost but other fixed costs may be relevant.

7. Consider the following statements:

I. Assemble all costs associated with each alternative being considered.
II. Eliminate those costs that are sunk.
III. Eliminate those costs that differ between alternatives.
Which of the above statements does not represent a step in identifying the relevant costs in a
decision problem?
a. Only I
b. Only II
c. Only III
Steps: i) Determine all costs associated with each alternative being considered
ii) Drop those costs that are sunk
iii) Drop those costs that do not differ between alternatives
d. Only I and III

8. The acceptance of a special order will improve overall net operating income so long as the
revenue from the special order exceeds:
a. The contribution margin on the order – revenue and CM are theoretically the same
b. The incremental costs associated with the order
In computing for the special order pricing through differential approach:
Incremental Revenue – Incremental Costs = Incremental Profit
c. The variable costs associated with the order – hmmmm
Special orders are accepted given that there is excess or idle facilities. Hence, fixed costs
are disregarded. Only variable costs associated with the order are considered. In pricing
special orders through total project approach (p.753), revenue from special order should
exceed variable costs to improve net operating income.
d. The sunk costs associated with the order

9. Allocated common fixed costs:

a. Can make a product line appear to be unprofitable
b. Are always incremental costs – they are not incremental costs.
c. Are always relevant in decisions involving a product line – allocated common fixed costs
are never relevant in decisions involving dropping of products because these costs will
incur regardless if a product is dropped or not.
d. A, B, and C are all correct

10. Consider the following statements:

I. A division’s net operating income, after deducting both traceable and allocated
common corporate costs is negative.
II. The division’s avoidable fixed costs exceed its contribution margin.
III. The division’s traceable fixed costs plus its allocated common corporate costs
exceed its contribution margin.
Which of the above statements give an economic reason for eliminating the division?
a. Only I – allocated common costs can make a product/segment unprofitable
b. Only II
Avoidable fixed costs are controllable (since it is avoidable) hence, it means that the
division is not planning or using its fixed costs well.
c. Only III – there is profit
d. Only I and II
11. In a make or buy decision:
a. Only the variable costs are relevant
b. Only the fixed costs are relevant
c. Both the variable costs and the fixed costs which will continue regardless of the decision
are relevant – variable costs must be subject to the decision.
d. Both the variable costs and the fixed costs which are avoidable are relevant
Idle capacity (fixed) and variable costs are considered in a make or buy decision. Example,
car manufacturers might use its idle capacity (fixed) to manufacture its own stock of shock
absorbers (composed of variable costs) instead of buying them from a supplier.

12. Which of the following best describes an opportunity cost?

a. It is relevant cost in decision making, but it is not part of the traditional accounting
records
They are hypothetical costs that is important in decision making but are not recorded in
the books of accounts. Imputed costs and opportunity costs may be used interchangeably.
(see question 1)
b. It is not a relevant cost in decision making but it is part of the traditional accounting
records
c. It is a relevant cost in decision making, and is part of the traditional accounting records.
d. It is not relevant cost in decision making, and is not part of the traditional accounting
records.

13. The opportunity cost of making a component part in a factory with excess capacity for which there
is not alternative use is:
a. The variable manufacturing cost of the component
b. The total manufacturing cost of the component
c. The fixed manufacturing cost of the component
d. Zero
Because the excess capacity has no alternative use. Hence, there is no possible opportunity
for which the excess capacity can be used for.

14. In a sell or process further decisions, consider the following costs:

I. A variable production cost incurred prior to split-off.
II. A variable production cost incurred after split-off
III. An avoidable fixed production cost incurred after split-off.
Which of the above costs is (are) not relevant in a decision regarding whether the product should
be processed further?
a. Only I
Costs incurred prior split-off are joint costs. What matters in a sell or process further
decision are selling price at split-off point and incremental costs and revenue after further
processing.
b. Only III
c. Only I and II
d. Only I and III

15. Consider the following statements:

I. A firm that decides to produce its own parts runs the risk of destroying long-run
relationships with suppliers.
II. An integrated firm is less dependent in its suppliers.
III. Changing technology often makes continued production of one’s own parts
costlier than buying them from the outside.
Which of these statements indicate hazards to a firm that arise from being vertically integrated?
a. Only I
b. Only II
c. Only I and II
d. Only I and III
Vertical Integration is an arrangement in which the supply chain of a company is owned by
that company. Statement II indicates the benefit of vertical integration while statement I
and III indicates the disadvantages.
16. Kala Company prepared the following tentative forecast concerning product A for 2018
Sales 500,000
Selling price per unit 5
Variable costs 300,000
Fixed costs 150,000
Study made by the sales manager disclosed that the unit selling price could be increased by 20%
with an expected volume decrease of only 10%. Assuming that Kala incorporates these changes in
its 2018 forecast, what should be the operating income from product A?
a. 66,000
b. 90,000
c. 120,000
Sales [(100,000 x 90%) x (5 x 120%)] 540,000
Less: Variable costs (300,000 x 90%) 270,000
CM 270,000
Less: Fixed Costs 150,000
Operating Income 120,000
d. 145,000

17. Wiggle Company sells product A at a selling price of 21 per unit. Wiggle’s cost per unit based on
the full capacity of 200,000 is as follows:
Direct materials 4
Direct labor 5
Overhead (2/3 of which is fixed) 6_
15
A special order affecting to buy 20,000 units was received from a foreign distributor. The only
selling costs that would be incurred on this order would be 3 per unit for shipping. Wiggle has
sufficient existing capacity to manufacture the additional units. In negotiating a price for the
special order, wiggle should consider that the minimum selling price per unit should be:
a. 14
DM 4
DL 5
Overhead (6 x 1/3) 2
Selling Cost 3_
Minimum selling price per unit 14
b. 15
c. 16
d. 18

18. Plainfield Company manufactures Part G for use in production cycle. The costs per unit for 10,000
units for Part G are as follows:
Direct materials 3
Direct labor 15
Variable overhead 6
Fixed overhead 8_
32
Verona Company has offered to sell Plainfield 10,000 units of Part G for 30 per unit. If Plainfield
accepts Verona’s offer, the released facilities could be used to save 45,000 in relevant costs in the
manufacture of Part H. In addition, 5 per unit of the fixed overhead applied to Part G would be
totally eliminated. What alternative is more desirable and by what amount is it more desirable?
Alternative Amount
a. Manufacture 10,000
b. Manufacture 15,000
c. Buy 35,000
Relevant cost to make (10,000 x 24) 240,000
Purchase cost 300,000
Less: Savings in manufacturing cost 45,000
Avoidable fixed overhead 50,000 95,000
Net purchase price 205,000
Difference in favor of buy alternative 35,000
d. Buy 65,000
19. Relic Corporation manufactures batons. Relic can manufacture 300,000 batons a year at a variable
cost of 750,000 and a fixed cost of 450,000. Based on Relic’s predictions, 240,000 batons will be
sold at the regular price of 5 each. In addition, a special order was placed for 60,000 batons to be
sold at a 40% discount off the regular price. By what amount would income before taxes be
increased or decrease as a result of the special order?
a. 60,000 decrease
b. 30,000 increase
a) Variable cost/unit at special price (5 x 60%) 3
Variable cost/unit at regular price (750,000/300,000) 2.5___
Difference in variable cost 0.5
Multiplied by special order qty 60,000
30,000
b) Increase in sales (60,000 x 3) 180,000
Less: Increase in variable cost (60,000 x 2.5) 150,000
Net increase in income 30,000
c. 36,000 increase
d. 180,000 increase

20. Three companies are each manufacturing and selling annually 10,000 units of a similar product at
a sales price of 20 per unit. The companies have fixed and variable costs as follows:
Company Fixed Cost Variable Cost per Unit
R 40,000 12
S 80,000 8
T 120,000 4
Each company contemplates a price decrease from 20 to 16 per unit in the expectation that sales
will increase from 10,000 to 15,000 units per year. The contribution margin for each company at
the present sales level is:
a. R = 80,000, S = 80,000, T = 80,000
b. R = 160,000, S = 120,000, T = 80,000
c. R = 80,000, S = 120,000, T = 160,000
R S T
Sales (10,000 x 20) 200,000 200,000 200,000
Variable Cost 120,000 80,000 40,000
CM 80,000 120,000 160,000
d. R = 40,000, S = 40,000, T = 40,000

21. Refer to No. 20. The operating income for each company at the contemplated price and sales level
are:
a. R = 60,000, S = 120,000, T = 80,000
b. R = 60,000, S = 60,000, T = 80,000
c. R = 40,000, S = 40,000, T = 40,000
d. R = 20,000, S = 40,000, T = 60,000
R S T
Sales (15,000 x 16) 240,000 240,000 240,000
Variable Cost 180,000 120,000 60,000
CM 60,000 120,000 180,000
Fixed Cost 40,000 80,000 120,000
Net income 20,000 40,000 60,000
e. None of the above

22. Refer to No. 20. The increase (decrease) in operating income for R Company resulting from the
price decrease and the sales volume increase is:
a. (20,000) decrease
10,000 at 20 15,000 at 16
Sales 200,000.00 240,000.00
Variable Cost 120,000.00 180,000.00
CM 80,000.00 60,000.00
Fixed Cost 40,000.00 40,000.00
Net Income 40,000.00 20,000.00 (20,000.00)
b. 20,000 increase
c. 5,000 increase
 d. No increase or decrease
e. None of the above

23. From the accounting records of Sta. Barbara Company, the following data on costs for the quarter
ended September 30, 2018 were determined:
Variable Costs Fixed Costs
Direct Materials 300,000
Direct Labor 400,000
Factory Overhead 80,000 50,000
Marketing Expenses 70,000 30,000
Administrative Expenses 50,000 20,000

Sales for the quarter totaled 1,200,000

The company is considering two alternative proposals that would change certain cost items.
Proposal A would increase fixed costs by 10,000 with sales and variable costs remaining the same.
Proposal B would involve acquiring modern equipment at an annual increase of fixed costs of
25,000, with an expectation of saving the same amount in each of the direct materials and direct
labor costs. If proposal A is adopted, the company’s profit would be:
a. 110,000
b. 120,000
c. 175,000
d. 190,000
Sales 1,200,000
Less: Variable costs
Direct materials 300,000
Direct labor 400,000
Factory overhead 80,000
Marketing expenses 70,000
Administrative expenses 50,000 900,000
Contribution margin 300,000
Less: Fixed costs
Factory overhead 50,000
Marketing expenses 30,000
Administrative expenses 20,000
Increase in fixed costs 10,000 110,000
Profit 190,000
e. None of the above

24. Refer to No, 23. If proposal B is adopted, the company’s profit would be:
a. 110,000
b. 120,000
c. 175,000
d. 190,000
e. None of the above
Sales 1,200,000
Less: Variable costs
Direct materials 275,000
Direct labor 375,000
Factory overhead 80,000
Marketing expenses 70,000
Administrative expenses 50,000 850,000
Contribution margin 350,000
Less: Fixed costs
Factory overhead 50,000
Marketing expenses 30,000
Administrative expenses 20,000
Decrease in fixed costs (P25,000/4) (6,250) 93,750
Profit 256,250
25. Scully Inc. has been manufacturing 5,000 units of part 20561 which is used in the manufacture of
one of its products. At this level of production, the cost per unit of manufacturing part 20561 is as
follows:
DM 2
DL 8
Variable Overhead 4
Fixed overhead applied 6_
20
Mudler company has offered to sell Scully 5,000 units of part 20561 for 19 a unit. Scully has
determined that it could use the facilities presently used to manufacture part 20561 to
manufacture product X and generate an operating profit of 4,000. Scully has also determined that
2/3 of the fixed overhead applied will continue even part 20561 is purchased from Mudler. To
determine whether to accept Mudler’s offer, the net relevant manufacturing costs to Scully are:
a. 70,000
b. 80,000
Direct materials (P2 x 5,000) 10,000
Direct labor (P8 x 5,000) 40,000
Variable overhead (P4 x 5,000) 20,000
Total variable costs 70,000
Add: Avoidable fixed overhead 10,000
Total 80,000
c. 90,000
d. 95,000

26. Dipper Company needs 20,000 of a certain part to use in its production cycle. The following
information is available:
Cost to Dipper to make Cost to buy
DM 4 Orion Company 36
DL 16
VOH 18
FOH-applied 10
48
If Dipper buys the part from Orion instead of making it, dipper could not use the released facilities
in another manufacturing activity. 60% of the FOH-applied will continue regardless of what
decision is made. In deciding whether to make or buy the part, the total relevant costs to make
the part are:
a. 560,000
b. 640,000
c. 720,000
d. 840,000
Avoidable fixed overhead 4
Direct materials 4
Direct labor 16
Variable overhead 18
Total 42
Multiplied by: Number of units to be produced 20,000
Total relevant costs to make the part 840,000

27. The Blade Division of Dana Company produces hardened steel blades. 1/3 of the blade division’s
output is sold to the Lawn Products Division of Dana. The remainder is sold to outside customers.
The Blade Division’s estimated sales and standard cost data for the fiscal year ending June 30,
2018 are as follows:
Lawn Products Outsiders
Sales 15,000 40,000
Variable Costs (10,000) (20,000)
Fixed Costs (3,000) (6,000)
Gross Margin 2,000 14,000

Unit Sales 10,000 20,000

The Lawn Products Division has an opportunity to purchase 10,000 blades of identical quality from
an outside supplier at a cost of 1.25 per unit on continuing basis. Assume that the Blade Division
 cannot sell any additional products to outside customers. Should Dana allow its Lawn Products
Division to purchase the blades from the outside supplier, and why?
a. Yes, because buying the blades would save Dana 500
b. No, because making the blades would save Dana 1,500
c. Yes, because buying the blades would save Dana 2,500
d. No, because making the blades would save Dana 2,500
Purchase cost (P1.25 x 10,000) 12,500
Variable costs to make (10,000)
Savings of making the blade 2,500

28. Sta. Helena Company manufactures men’s caps. The projected income statement for the year
before any special order is as follows:
Amount Per unit
Sales 400,000 20
COGS 320,000 16
Gross Margin 80,000 4
Selling Expenses 30,000 3_
Operating Income 50,000 1

Fixed costs included in above projected income statement are 80,000 in COGS and 9,000 in selling
expenses.

A special order offering to buy 2,000 caps for 17 each was made to Sta. Helena. No additional
selling expenses will be incurred if the special order is accepted. Sta. Helena has the capacity to
manufacture 2,000 more caps. As a result of the special order, the operating income would
increase by:
a. 34,000
b. 24,000
c. 10,000
Selling price per unit 17
Less: Variable costs of goods sold per unit
([P320,000 - P80,000] 20,000 units) 12
Contribution margin per unit 5
Multiplied by units to be sold under Special Order 2,000
Increase in operating income 10,000
d. No increase or decrease
e. None of these

29. Petey Company is considering a proposal to replace existing machine used for the manufacture of
product A. the new machines are expected to cause increased annual fixed costs of 120,000.
However, variable costs should decrease by 20% due to a reduction in direct labor hours and more
efficient usage of direct materials. Before this change was under consideration, Petey had
budgeted product A sales and costs for 2018 as follows:
Sales 2,000,000
Variable Costs 70% of sales
Fixed Costs 400,000
Assuming that Petey implemented the above proposal by Jan 1, 2018. What would be the increase
in budgeted operating profit for product A for 2018?
a. 160,000
Budgeted operating income:
Contribution margin (P2,000,000 x 30%) 600,000
Less fixed costs 400,000
Net operating income 200,000
Operating income under the proposal:
Sales 2,000,000
Less Variable costs
([70% x P2,000,000] x 80%) 1,120,000
Contribution margin 880,000
Less fixed costs 520,000 360,000
Increase in budgeted operating profit 160,000
b. 280,000
 c. 360,000
d. 480,000

30. Laney Appliances Company makes and sells electric fans. Each fan regularly sells for 42. The
following cost data per fan is based on a full capacity of 150,000 fans produced each period.
DM 8
DL 9
FOH (70% variable and 30% unavoidable fixed) 10
A special order has been received by Laney for a sale of 25,000 fans to an overseas customer. The
only selling costs that would be incurred on this order would be 4 per fan of shipping. Laney is
now selling 120,000 fans through regular channels each period. What should Laney use as a
minimum selling price per fan in negotiating a price for this special order?
a. 28
DM 8
DL 9
FOH Variable (70% x 10) 7
Shipping 4_
28
b. 27
c. 31
d. 24

31. Zach Company produces and sells 8,000 units of product X each year. Each unit of product x sells
for 10 and has a contribution margin of 6. It is estimated that if product x is discontinued, 50,000
of the 60,000 in fixed costs charged to product x could be eliminated. These data indicate that if
product x is discontinued, overall company operating income should:
a. Increase by 2,000 per year
Product X Discontinue * Net income will increase
Sales (8,000 x 10) 80,000
because the Operating income of
Variable Costs 32,000
2,000 will be taken away from the
CM (8,000 x 6) 48,000
Fixed Costs 50,000 total income
Increase (2,000)
b. Decrease by 2,000 per year
c. Increase by 28,000 per year
d. Decrease by 28,000 per year

32. The Siller company has two divisions –East and West. The divisions have the following revenues
and expenses:
East West
Sales 720,000 350,000
Variable costs 370,000 240,000
Traceable fixed costs 130,000 80,000
Allocated common corporate costs 120,000 50,000
Operating income (loss) 100,000 (20,000)
The management at Siller is pondering the elimination of the West division since it has shown an
operating loss for the past several years. If the west division were eliminated, its traceable fixed
costs could be avoided. The total common corporate costs would be unaffected by this decision.
Given these data, the elimination of the west division would result in an overall company
operating income of:
a. 100,000
b. 80,000
c. 120,000
d. 50,000
East West West Eliminated
Sales 720,000
Variable Costs 370,000
Traceable Fixed Costs 130,000
Allocated Common Corp Costs 120,000 50,000
Operating Income/Loss 100,000 (50,000) 50,000
33. ADD Realty manages 5 apartment complexes in its region. Shown below are summary income
statements for each apartment complex:
U V W X Y
Rental income 1,000 1,210 2,347 1,878 1,065
Expenses 800 1,300 2,600 2,400 1,300
Operating Income 200 (90) (253) (522) (235)
Included in the expenses is 1,200 of common corporate expenses that have been allocated to the
apartment complexes based on rental income. These common corporate expenses would have to
be incurred regardless of how many apartment complexes ADD Realty manages. The apartment
complexes that ADD Realty should consider dropping is/are:
a. V, W, X, Y (or this is the possible answer)
b. W, X, Y
c. X, Y
U V W X Y Total
Rent Income 1,000 1,210 2,347 1,878 1,065 7,500
Expenses 800 1,300 2,600 2,400 1,300 8,400
CM 200 (90) (253) (522) (235) (900)
CM% 80% -1.7% -1.11% -1.28% -1.22% -1.12%
Corporate Expenses 160 194 376 300 170 1,200
Operating Income 40 (284) (629) (822) (405) (2,100)
X and Y has the biggest CM to the loss
d. X

34. Mott company manufactures 10,000 units of Part EM each year for use in its production. The
following costs were reported last year:
DM 20,000
DL 55,000
VMOH 45,000
FMOH 70,000
Total manufacturing costs 190,000
Volvo Company has offered to sell Mott 10,000 units of Part EM for 18 per unit. If Mott accepts
the offer, some of the facilities presently used to manufacture Part EM could be rented to a third
party at an annual rental of 15,000. Additionally, 4 per unit of the fixed overhead applied to part
EM would be totally eliminated. Should Mott accept Volvo’s offer, and why?
a. No, because it would be 5,000 cheaper to make the part
Buy
Purchase Cost (18 x 10,000) 180,000
Less: Rent Income 15,000
Net Purchase Cost 165,000
Add: FMOH savings (70,000-(4 x 10,000)) 30,000
Total Cost to Buy 195,000
Total Manufacturing Cost 190,000
Cheaper to Make 5,000
b. Yes, because it would be 10,000 cheaper to buy the part
c. No, because it would be 15,000 cheaper to make the part
d. Yes, because it would be 25,000 cheaper to buy the part

35. Hollie Company produces three products with costs and selling prices show below:
A B C
Selling price/unit 30 100% 20 100% 15 100%
Variable cost/unit 18 60% 15 75% 6 40%
CM/unit 12 40% 5 25% 9 60%
A particular machine is a bottleneck. On the machine, 3 machine hours are required to produce
each unit of product A, 1 hour is required to produce each unit of product B, and 2 hours are
required to produce each unit of product C. in which order should it produce its products?
a. CAB
b. ACB
c. BCA
In order of which is faster to make
d. The order of production doesn’t matter