Accounting Q&A · Cost and Management Accounting · Topic 14
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
An order brings in 5,000. Its variable costs are 3,200 and setup costs are 600. With spare capacity and no other effects, it adds 1,200 of contribution after setup.
Core concepts
1. What is a relevant cost?
A future cost that differs between alternatives.
2. What is a sunk cost?
A past cost that the decision cannot change.
3. What is an opportunity cost?
The benefit forgone from the next best available alternative.
4. What is an avoidable cost?
A cost eliminated by choosing an alternative.
5. What is an incremental cost?
An extra cost caused by selecting an option.
6. Are allocated fixed costs always relevant?
Include only costs that change. An allocation can remain even if an activity stops.
7. Can a fixed cost be relevant?
Yes, for example an additional supervisor hired only if an order is accepted.
8. What is the relevant cost of routinely used material taken from stock?
Normally its replacement cost if the stock will be replenished.
9. What is the relevant cost of obsolete material that could be sold?
The net sale proceeds forgone, assuming there is no better alternative use.
10. What is the relevant labour cost when staff are fully occupied?
Include additional pay, if any, and contribution lost from displaced work, avoiding double counting.
Worked applications
11. A special order earns 6,000 and causes 4,500 of costs. What is its incremental benefit?
1,500 assuming spare capacity and no other effects.
12. If the same order displaces 1,800 of contribution, what is its net effect?
A loss of 300 compared with declining it.
13. What should you compare in a make-or-buy decision?
Compare supplier cost with avoidable internal costs and the value of capacity freed.
14. Making costs 12 per unit, including 4 unavoidable fixed overhead. Buying costs 9. Which is cheaper on these facts?
Making costs 8 relevant per unit and is cheaper by 1, ignoring other effects.
15. What if buying releases capacity worth 2 per unit?
Buying now has a net cost of 7, making it cheaper by 1 on these assumptions.
16. How do you assess closing a product line?
Compare lost contribution with avoidable fixed costs and other benefits of closure.
17. A line contributes 20,000 and closure saves 12,000. What is the effect?
Profit falls by 8,000, absent other changes.
18. What matters when deciding to process a joint product further?
Incremental sales value compared with incremental processing and related costs.
19. Further processing adds 3,000 revenue and costs 2,100. What is the net benefit?
900.
Review and exam practice
20. How should products be ranked with one binding bottleneck?
Rank by contribution per unit of the scarce resource, subject to demand and other constraints.
21. A contributes 24 and needs three machine hours. What is contribution per scarce hour?
8 per hour.
22. B contributes 18 and needs two machine hours. Which ranks higher?
B at 9 per hour, compared with A at 8.
23. Why consider quality and reliability in outsourcing?
Delivery or defects can affect revenue and costs beyond the supplier quote.
24. Why state the decision horizon?
Costs fixed today may become avoidable over a longer period.
25. What is a useful final check?
Compare each option against the same baseline and separate quantified effects from uncertainties.