CH05MANAGEMENT ACCOUNTING INFORMATIONFOR ACTIVITY AND PROCESS DECISIONSTRUE/FALSE1. Sunk costs are never relevant costs for decision making.a. Trueb. False2. An example of a sunk cost is the amount of a guaranteed contract that has not yet beenpaid.a. Trueb. False3. Personal employee responses are not critical considerations for the business decisionmaker.a. Trueb. False4. For decision-making, differential costs assist in choosing between alternatives.a. Trueb. False5. For a particular decision, differential revenues and costs are always relevant.a. Trueb. False6. A cost may be relevant for one decision, but not relevant for a different decision.a. Trueb. False7. Avoidable costs should be evaluated when deciding whether to discontinue a part, product,product line, or business segment.a. Trueb. False8. In make-or-buy decisions, facility-sustaining support costs are unavoidable if the facilitycan be converted to another use.a. Trueb. False9. For one-time-only special orders, flexible costs may be relevant but not capacity-relatedcosts.a. Trueb. False10. Bid prices and costs that are relevant for regular orders are the same costs that are relevantfor one-time-only special orders.a. Trueb. False11. When opportunity costs exist, they are always relevant.a. Trueb. False12. Depreciation allocated to a product line is a relevant cost when deciding to discontinue thatproduct.a. Trueb. False13. When replacing an old machine with a new machine, the book value of the old machine is arelevant cost.a. Trueb. False14. If a company is deciding whether to outsource a part, the reliability of the supplier is animportant factor to consider.a. Trueb. False15. Sometimes qualitative factors are the most important factors in make-or-buy decisions.a. Trueb. False16. If a company is deciding whether to outsource a part, the reliability of the supplier is animportant factor to consider.a. Trueb. False17. Outsourcing is risk-free to the manufacturer because the supplier now has the responsibilityof producing the part.a. Trueb. False18. The central goal of the facility layout design process is to streamline operations to increaseoperating income.a. Trueb. False19. In a process layout, batch production causes inventory costs.a. Trueb. False20. The reduction of setup costs makes smaller batch sizes more feasible.a. Trueb. False21. In batch processing, workers downstream can identify an upstream problem immediately.a. Trueb. False22. The theory of constraints focuses on long-term initiatives to increase operating income.a. Trueb. False23. A processing cycle efficiency (PCE) of 14% indicates better efficiency than a PCE of 50%.a. Trueb. False24. When using a just-in-time manufacturing, a problem anywhere in the system can stop allproduction.a. Trueb. False25. Implementing a just-in-time inventory system requires a major cultural change for anorganization.a. Trueb. False26. Global competition led to the development of international quality standards such as ISO9000 2000 Standards.a. Trueb. False27. External quality problems are expensive to fix.a. Trueb. False28. Experience shows that it is more expensive to prevent defects than to detect and repairthem.a. Trueb. FalseMULTIPLE CHOICE29. Sunk costs:a. are relevantb. are differentialc. have future implicationsd. are ignored when evaluating alternatives30. A computer system installed last year is an example of:a. a sunk costb. a relevant costc. a differential costd. an avoidable cost31. Costs that cannot be changed by any decision made now or in the future are:a. fixed costsb. indirect costsc. avoidable costsd. sunk costs32. For decision making, a listing of the relevant costs:a. will help the decision maker concentrate on the pertinent datab. will only include future costsc. will only include costs that differ among alternativesd. should include all of the above33. Which of the following costs are NEVER relevant in the decision-making process?a. capacity-relatedb. historical costsc. relevant costsd. variable costs34. When deciding to lease a new cutting machine or continue using the old machine, thefollowing costs are all relevant EXCEPT the:a. $50,000 cost of the old machineb. $20,000 cost of the new machinec. $10,000 selling price of the old machined. $3,000 annual savings in operating costs if the new machine is purchased35. In evaluating different alternatives, it is useful to concentrate on:a. flexible costsb. capacity-related costsc. total costsd. relevant costs36. Relevant costs of a make-or-buy decision include all EXCEPT:a. fixed salaries that will not be incurred if the part is outsourcedb. current direct material costs of the partc. special machinery for the part that has no resale valued. material-handling costs that can be eliminated37. Which of the following would NOT be considered in a make-or-buy decision?a. capacity-related costs that will no longer be incurredb. flexible costs of productionc. potential rental income from space occupied by the production aread. unchanged supervisory costs38. Relevant costs in a make-or-buy decision of a part include:a. setup overhead for the manufacture of the product using the outsourced partb. currently used manufacturing capacity that has alternative usesc. annual plant insurance costs that will remain the samed. corporate office costs that will be allocated differently39. When deciding to accept a one-time-only special order from a wholesaler, managementshould do all of the following EXCEPT:a. analyze product costsb. consider the impact of the special order on future prices of their productsc. determine whether excess capacity is availabled. verify past design costs for the product40. When there is excess capacity, it makes sense to accept a one-time-only special order forless than the current selling price when:a. incremental revenues exceed incremental costsb. additional capacity-related costs must be incurred to accommodate the orderc. the company placing the order is in the same market segment as your currentcustomersd. None of the above is correct.41. When deciding whether to discontinue a segment of a business, managers should focus on:a. equipment used by the segment that could become idleb. reallocation of corporate costsc. how total costs differ among alternativesd. operating income per unit of the discontinued segment42. Costs are relevant to a particular decision if they:a. are flexible costsb. are capacity-related costsc. differ across the alternatives being consideredd. remain unchanged across the alternatives being consideredTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 43 THROUGH 46. Flowers-For-Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:Existing van New vanOriginal cost $100,000 $180,000Annual operating cost $ 35,000 $ 20,000Accumulated depreciation $ 60,000 ---Current salvage value of the existing van $ 45,000 ---Remaining life 10 years 10 yearsSalvage value in 10 years $ 0 $ 0Annual depreciation $ 4,000 $ 18,00043. Sunk costs include:a. the original cost of the existing vanb. the original cost of the new vanc. the current salvage value of the existing vand. the annual operating cost of the new van44. Relevant costs for this decision include:a. the original cost of the existing vanb. accumulated depreciationc. the current salvage value of the existing vand. the salvage value in 10 years45. If Flowers-For-Everyone replaces the existing delivery van with the new one, over the next10 years operating income will:a. decrease by $180,000b. increase by $150,000c. decrease by $150,000d. None of the above is correct.46. Should Flowers-for-Everyone replace the existing van with the new van? What are thesavings or additional cost?a. Yes replace, net savings of $15,000b. Yes replace, net savings of $150,000c. No replace, additional costs of $120,000d. No replace, additional costs of $30,000THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 47 AND 48.Jim’s 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:Geo Prizm Honda CivicAcquisition cost $15,000 $3,000Repairs $ 3,000 ---Annual operating costs(Gas, maintenance, insurance) $ 2,280 $2,10047. The cost(s) NOT relevant for this decision is(are):a. the acquisition cost of the Geo Prizmb. the acquisition cost of the Honda Civicc. the repairs to the Geo Prizmd. the annual operating costs of the Honda Civic48. What should Jim do? What are his savings in the first year?a. Buy the Honda Civic; $9,780b. Fix the Geo Prizm; $5,518c. Buy the Honda Civic; $180d. Fix the Geo Prizm; $5,280THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 49 THROUGH 51. Konrade’s Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:Direct materials $ 40,000Direct labor 10,000Flexible support costs 30,000Capacity-related support costs 20,000Total costs $100,000It is estimated that 10% of the capacity-related support costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade’s Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.49. If Konrade’s Engine Company accepts the offer from the o utside supplier, the monthlyavoidable costs (costs that will no longer be incurred) total:a. $ 82,000b. $ 98,000c. $ 50,000d. $100,00050. If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier permonth, then its monthly operating income will:a. increase by $2,000b. increase by $80,000c. decrease by $3,000d. decrease by $85,00051. The maximum price that Konrade’s Engine Company should be willing to pay the outsidesupplier is:a. $80 per TE456 partb. $82 per TE456 partc. $98 per TE456 partd. $100 per TE456 partTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 AND 53.Melodee’s Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:Direct materials $0.25Direct labor 0.03Unit-related support costs 0.10Batch-related support costs 0.12Product-sustaining support costs 0.22Facility-sustaining support costs 0.28Total cost per jar $1.0052. The relevant cost per jar is:a. $0.28 per jarb. $0.38 per jarc. $0.72 per jard. $1.00 per jar53. The maximum price that Melodee’s Preserves should be willing to pay for the decorativejars is:a. $0.28 per jarb. $0.38 per jarc. $0.72 per jard. $1.00 per jarTHE FOLLOWING INFORMATION APPLIES TO QUESTIONS 54 AND 55.Denly Company has three products, A, B, and C. The following information is available:Product A Product B Product C Sales $60,000 $90,000 $24,000Flexible costs 36,000 48,000 15,000Contribution margin 24,000 42,000 9,000Capacity-realted costs:Avoidable 9,000 18,000 6,000Unavoidable 6,000 9,000 5,400 Operating income $ 9,000 $15,000 $ (2,400) 54. Denly Company is thinking of dropping Product C because it is reporting a loss.Assuming Denly drops Product C and does not replace it, operating income will:a. increase by $2,400b. increase by $3,000c. decrease by $3,000d. decrease by $5,40055. Assuming Product C is discontinued and the space formerly used to produce Product C isrented for $12,000 per year, operating income will:a. increase by $6,600b. increase by $9,000c. increase by $12,000d. increase by $14,40056. Which of the following does NOT need to be considered when evaluating a make-or-buydecision?a. savings from an alternative use of the production equipmentb. the original cost of the production equipmentc. the quality of the supplier's productd. the reliability of the delivery schedule57. When making decisions:a. quantitative factors are the most importantb. qualitative factors are the most importantc. appropriate weight must be given to both quantitative and qualitative factorsd. both quantitative and qualitative factors are unimportant58. Employee morale at Dos Santos, Inc., is very high. This type of information is known as:a. a qualitative factorb. a quantitative factorc. a differential factord. an opportunity cost59. Which of following are risks of outsourcing the production of a part?a. unpredictable qualityb. unreliable deliveryc. unscheduled price increasesd. All of the above are risks of outsourcing.60. Which of the following minimize the risks of outsourcing?a. the use of short-term contracts that specify priceb. the responsibility for on-time delivery is now the responsibility of the supplierc. building close relationships with the supplierd. All of the above minimize the risks of outsourcing.61. When evaluating a make-or-buy decision, which of the following does NOT need to beconsidered?a. alternative uses of the production capacityb. the original cost of the production equipmentc. the quality of the supplier's productd. the reliability of the supplier's delivery schedule62. In __________, all similar equipment or functions are grouped together.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production63. Characteristics of a process layout include:a. continuous processingb. long production pathsc. small amounts of inventoryd. no work-in-process storage areas64. In _______, equipment is organized to accommodate the production of a specific product.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production65. Characteristics of a product layout include:a. raw materials and purchased parts are delivered directly to the production line wherethey are neededb. low-volume productionc. a U-shaped layoutd. small batches of unique products66. In __________, the plant is organized into areas where all machines used to manufacture agroup of similar products are close to each other.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production67. Characteristics of cellular manufacturing include:a. a layout that is usually circular like a cellb. increasing the number of employees needed to produce a productc. individual areas for employees so each can work independently without interruptiond. a flexible layout that can be easily adjusted to make a different product68. The theory of constraints:a. emphasizes long-term optimizationb. maintains that maximizing volume through production bottlenecks will increaseoperating incomec. helps managers make special one-time decisionsd. suggests that some component parts should be outsourced69. Constraints may include:a. the availability of direct materials in manufacturingb. linear square feet of display space for a retailerc. direct labor in the service industryd. All of the above are correct.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 74. Braun’s Brakes manuf actures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:Model X Model Y Model Z Selling price $50 $60 $70Direct materials 6 6 6Direct labor ($12 per hour) 12 12 24Variable support costs ($4 per machine-hour) 4 8 8Fixed support costs 10 10 1070. Which model has the greatest contribution margin per unit?a. Model Xb. Model Yc. Model Zd. both Models X and Y71. Which model has the greatest contribution margin per machine-hour?a. Model Xb. Model Yc. Model Zd. both Models Y and Z72. If there is excess capacity, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models X and Y73. If there is a machine breakdown, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models Y and Z74. How can Lisa Braun encourage her salespeople to promote the more profitable model?a. Put all sales persons on salary.b. Provide higher sales commissions for higher priced items.c. Provide higher sales commissions for items with the greatest contribution margin perconstrained resource.d. Both (b) and (c) are correct.75. High levels of inventory result in all EXCEPT:a. high moving, handling, and storage costsb. increased product obsolescence and damagec. increased financing costsd. idle facilities76. The implementation of just-in-time production results in all of the following EXCEPT:a. decreased cycle timesb. reduced amount of wastec. a slower pace for employeesd. structural changes77. Characteristics of just-in-time manufacturing include all of the following EXCEPT:a. the ability to process items in large batchesb. making a product only when the customer requires itc. no work-in-process inventoriesd. a problem anywhere can stop production78. Measures of JIT (just-in-time) manufacturing reliability include all of the followingEXCEPT:a. defect ratesb. labor and machine utilization ratiosc. cycle timesd. percent of on-time deliveries79. Of the four quality costing categories, the most damaging category to the organization is:a. prevention costsb. appraisal costsc. internal failure costsd. external failure costs80. __________ are incurred when a defective component is discovered before shipment to thecustomer.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costs81. _________ are incurred when a customer discovers a defect.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costs82. Training employees in methods to maintain quality is an example of __________.a. prevention costsb. appraisal costsc. internal failure costsd. external failure costs83. __________ include the cost of raw-materials inspections and assembly-line inspections.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costsThe following estimates have been prepared to evaluate the benefits from the reorganization:Before the change After the change Total annual sales $600,000 $800,000Costs as a percentage of sales:Direct materials 23% 20%Direct labor 9% 7%Support costs 18% 13% Work-in-process inventory $125,000 $ 90,000 Inventory carrying costs are estimated to be 10% per year.84. As a result of the layout reorganization, reduced levels of work-in-process inventory areprojected to decrease inventory carrying costs by:a. $12,500b. $ 9,000c. $ 6,000d. $ 3,50085. As a result of the layout reorganization, incremental manufacturing costs are projected to:a. increase by $84,000b. increase by $20,000c. decrease by $20,000d. decrease by $16,50086. As a result of switching to a cellular manufacturing operation, total benefits are projected toincrease by:a. $216,500b. $200,000c. $183,500d. $176,50087. After the change, a decreased amount of work-in-process inventory is projected because:a. of reduced cycle times resulting from a more continuous production flowb. of lower financing costs and the reduced need for storage and handlingc. larger batches can be processed faster and more efficientlyd. All of the above are correct.88. After the change, direct labor costs as a percentage of sales are projected to decreasebecause:a. less work-in-process inventory needs to be moved from location to locationb. fewer employees are needed to produce a product due to the new work designc. less supervisors are needed to oversee operationsd. All of the above are correct.The following estimates have been prepared to evaluate the benefits from the reorganization:Before the change After the change Total annual sales $500,000 $750,000Costs as percentage of sales:Direct materials 20% 17%Direct labor 8% 7%Support costs 12% 6% Work-in-process inventory $100,000 $ 80,000 Inventory carrying costs are estimated to be 11% per year.89. As a result of the layout reorganization, reduced levels of work-in-process inventory areprojected to decrease inventory carrying costs by:a. $ 2,200b. $ 7,500c. $ 8,800d. $11,00090. As a result of the layout reorganization, incremental manufacturing costs are projected to:a. decrease by $22,800b. decrease by $25,000c. increase by $25,000d. increase by $40,00091. As a result of switching to a cellular manufacturing operation, total benefits are projected toincrease by:a. $222,800b. $227,200c. $272,800d. $277,20092. After the change, sales are projected to increase because:a. of shorter delivery lead timesb. of higher sales pricesc. of the ability to process larger batch sizesd. All of the above are correct.93. After the change, work-in-process carrying costs are projected to decrease because of:a. reduced costs in materials handlingb. lower financing costsc. the decreased need for inventory storaged. All of the above are correct.EXERCISE / PROBLEM94. Karen’s Cookie Company is consi dering replacing its giant cookie mixer with a new one.The following data have been compiled to evaluate the decision.Existing NewOriginal cost $8,000 $10,000Annual operating cost $4,000 $2,200Remaining life 5 years 5 yearsDisposal value now $3,000 ---Required:a. What costs are relevant?b. What costs are sunk?c. What are the net cash flows assuming Karen’s Cookie Company purchases the newcookie mixer?95. Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, TurboOvens Manufacturing announced the availability of a new convection oven that cooksmore quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost, convection oven to replace the existing one they recently purchased.Selected information about the two ovens is given below:Existing New Turbo OvenOriginal cost $60,000 $50,000Accumulated depreciation $ 5,000 ---Current salvage value $40,000 ---Remaining life 5 years 5 yearsAnnual operating expenses $10,000 $ 7,500Disposal value in 5 years $ 0 $ 0 Required:a. What costs are sunk?b. What costs are relevant?c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases thenew convection oven?d. What other items should Pat, as manager of the Pizzeria, consider when making thisdecision?96. Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units areproduced each year with production costs as follows:Direct materials $ 45,000Direct labor 15,000Flexible support costs 35,000Capacity-related support costs 25,000Total costs $120,000Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the capacity-related costs cannot be immediately converted to other uses.Required:a. Describe avoidable costs. What amount of the WB23 production costs is avoidable?b. Should Quiett Truck outsource WB23? Why or why not?c. What other items should Quiett Truck consider before outsourcing any of the parts itcurrently manufactures?97. Freddie’s Fudge Factory currently makes fudge for retail and mail order customers. It alsooffers a variety of roasted nuts. Fudge sales have increased over the past year, so Freddie is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.85 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts: Direct materials $0.50Direct labor 0.06Unit-related support costs 0.10Batch-related support costs 0.04Product-sustaining support costs 0.05Facility-sustaining support costs 0.15Total cost per pound $0.90Required:a. Should Freddie’s Fudge Factory outsource the roasted nuts? Why or why not? Discussall items that should be considered.b. What incentives can Freddie offer the supplier of the roasted nuts to encouragecontinued reliability?98. Kirkland Company manufactures a part for use in its production. When 10,000 itemsare produced, the costs per unit are:Direct materials $0.60Direct manufacturing labor 3.00Flexible manufacturing support 1.20Fixed manufacturing support 1.60Total $6.40Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing support on the original item would be eliminated.Required:a. What is the relevant per unit cost for the original part?b. Which alternative is best for Kirkland Company? By how much?99. Lewis Auto Company manufactures a part for use in its production of automobiles.When 10,000 items are produced, the costs per unit are:Direct materials $ 12Direct manufacturing labor 60Flexible manufacturing support 24Fixed manufacturing support 32Total $128Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for$120 per unit. The plant facilities could be used to manufacture another part at asavings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing support on the original part would be eliminated.Required:a. What is the relevant per unit cost for the original part?b. Which alternative is best for Lewis Auto Company? By how much?100. Carey Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells.The following estimates have been prepared to evaluate the benefits from thereorganization:Before the change After the change Total annual sales $700,000 $850,000Costs as percentage of sales:Direct materials 10% 9%Direct labor 6% 4%Support costs 9% 7% Work-in-process inventory $200,000 $120,000 Inventory carrying costs are estimated to be 12% per year.Required:a. Why do the layout reorganization estimates include1. a decrease in work-in-process inventory?2. a decrease in direct material costs as a percentage of sales?3. an increase in sales?b. As a result of the layout reorganization, what amount of change is projected1. from carrying reduced levels of work-in-process inventory?2. for incremental manufacturing costs?3. in total benefits?。