AAT Co

812 COST AND PROFIT ANALYSIS PART VII 11. For each of the following statements, select the correct answer. (a) As part of the data presented in support of a proposal to increase the production of clock-radios, the sales manager of Wittman Electronics reported the total additional cost required for the proposed increased production level. The increase in total cost is known as (1) controllable cost; (2) differential cost ; (3) opportunity cost ; (4) out-of-pocket cost. (b) An item whose entire amount is usually a differential cost is (1) factory overhead; (2) direct cost; (3) conversion cost; (4) period cost. (c) In the development of accounting data for decision-making purposes, relevant costs are defined as (1) future costs which will differ under each alternative course of action; (2) the change in prime cost under each alternative course of action; (3) standard costs which are developed by time and motion study techniques because of their relevance to managerial control; (4) historical costs which are the best available basis for estimating future costs. (d) The effect on a company's net income before income taxes of discontinuing a department with a contribution to overhead of $16,000 and allocated overhead of $32,000, of which $14,000 cannot be eliminated, would be to (1) decrease net income before income taxes by $2,000; (2) decrease net income before income taxes by $18,000; (3) increase net income before income taxes by $2,000; (4) increase net income before income taxes by $16,000. (e) Costs that do not appear in accounting records and that do not require dollar outlays but do involve a foregone opportunity by the entity whose costs are being measured are (1) conversion costs; (2) differential costs; (3) imputed costs ; (4) prime costs. (f) Pena 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 (1) fixed costs; (2) variable costs; (3) variable costs plus any opportunity cost of the idle facilities; (4) indirect costs plus any opportunity cost of the idle facilities. (AICPA adapted)