Managerial Accounting Ch 2 L06 & L07 L06 2.6 Describe costs that are relevant and irrelevant to decision making. 1) Differential cost is the difference in cost between two alternatives. T or F 2) Decision making is guided only by differential costs. T or F 3) Irrelevant factors should be considered when making decisions. T or F 4) You are trying to decide whether or not to sell back your accounting textbook at the end of the class. The cost you paid for the book is relevant to your decision. T or F 5) Sunk costs are a major part of the decision making process. T or F 6) Costs resulting from product design are locked in. T or F 7) information is that which differs between alternatives and can affect the future. A) Historical B) Irrelevant C) Predictable D) Relevant 8) Which of the following represents a sunk cost? A) A historical cost that is never relevant B) A historical cost that is always relevant C) An outlay expected to be incurred in the future D) A cost that is relevant to any decision 9) Subtracting the costs of one alternative from the costs of the other alternative would be called the cost. A) sunk B) imported C) differential D) alternative 10) When deciding to buy a new computer, the irrelevant cost is the A) cost of the new computer. B) cost of the old computer. C) games that come with the new computer. D) warranty on the new computer. 11) When making a decision to buy a new computer, the irrelevant costs are the A) differential costs. B) relevant costs. C) qualitative characteristics. D) sunk costs. 12) A company is deciding whether to purchase production equipment which can produce units more quickly than the current equipment. Which of the following costs would be relevant to its decision? A) The cost of the new equipment B) The salary of the factory manager C) The cost of raw materials D) The original purchase price of the current machinery 13) A restaurant is facing a decision about whether it should bake its own dinner rolls or whether it should continue to purchase the dinner rolls from a local bakery. Which of the following costs would be relevant to its decision? A) The salary of the restaurant manager B) The purchase price of the dinner rolls purchased from the local bakery C) The price the restaurant sells the dinner rolls for D) The original purchase price of the current machinery 14) A company is deciding whether to purchase hybrid cars for its salespeople or gasoline-engine cars. Which of the following costs is irrelevant to its decision? A) The cost per gallon of gasoline B) The purchase price of the hybrid model C) The purchase price of the gasoline-engine model D) The book value of the current fleet of sales vehicles 15) Jansen Industries is considering replacing a machine that is presently used in its production process. The following information is available: Replacement Old Machine Machine I-- __-- _-:: _::: Which of the information provided in the table is irrelevant to the replacement decision? A) The annual operating cost of the old machine B) The original cost of the old machine C) The current disposal value of the old machine D) The future disposal value of the replacement machine E) The remaining useful life of the old machine Ch. 2 L0 7 Classi costs as fixed or variable and calculate total and average costs at different volumes. For Questions #15, determine whether each statement is True or False. 1) Fixed costs stay constant in total over a wide range of activity levels. 2) All costs contain both a xed and a variable part. 3) The total cost of a product equals the total fixed costs plus the average variable costs. 4) A marginal cost is the cost of making one more unit of a product. 4) A marginal cost is the cost of making one more unit of a product. 5) Average costing should be used to forecast costs at different levels of production. For Questions #615, circle the best answer. 6) Total variable costs A) remain the same as production decreases. B) remain the same as production increases. C) go down as production decreases. D) remain the same no matter if production increases or decreases. 7) The cost of making one more unit is called A) marginal cost. B) unit cost. C) variable cost. D) fixed cost. 8) Farm Supply plans to make 10,000 tractors at its plant. Fixed costs are $1,000,000 and variable costs are $500 per tractor. What is the average cost per tractor? A) $600 B) $500 (I) $100 D) $1,500 9) A(n) cost is one whose total amount changes in direct proportion to a change in volume. A) xed B) irrelevant C) mixed D) variable 10) Which of the following is an example of a fixed cost for a manufacturer? A) Salary of plant manager B) Sales commissions C) Direct materials D) Delivery costs 11) Which of the following describes the way in which variable costs per unit behave? A) They will decrease as production increases. B) They will increase as production decreases. C) They will remain the same as production levels change. D) They will decrease as production decreases. 11) Which of the following describes the way in which variable costs per unit behave? A) They will decrease as production increases. B) They will increase as production decreases. C) They will remain the same as production levels change. D) They will decrease as production decreases. 12) Which of the following describes the way in which total variable costs behave? A) They remain the same as production levels change. B) They will decrease as production decreases. C) They will decrease as production increases. D) They will increase as production decreases. 13) Which of the following describes the way in which total xed costs behave? A) They will remain the same as production levels change. B) They will decrease as production decreases. C) They will decrease as production increases. D) They will increase as production decreases. 14) Which of the following describes the way fixed costs per unit behave? A) They will remain the same as production levels change. B) They will decrease as production decreases. C) They will increase as production increases. D) They will increase as production decreases. 15) Variable costs A) are fixed in total as production levels change. B) are fixed per unit and vary in total as productions levels change. C) decrease per unit as production volume increases. ) vary per unit of output as production levels change. U