Managment accounting lec 7

Question 1

Relevant costs and relevant revenues are

Answer 1

costs and revenues that will differ for each option available to the decision maker

Question 2

sunk costs

Answer 2

past costs, costs already incurred, irrelevant to a decision

Question 3

what are relevant costs and revenues

Answer 3

futures costs and revenues that will change under different options

Question 4

What are variable costs

Answer 4

they vary in direct proportion with activity RELEVANT

Question 5

what are fixed costs

Answer 5

remain constant over wide ranges of activities (do not change in total for given time period despite wide changes in in the related level of total activity or volume NOT RELEVANT

Question 6

What affects the classification of costs

Answer 6

time period involved, short term some costs are fixed, long term they are variable

Question 7

what are opportunity costs

Answer 7

value of the benefit sacrificed when one course of action is chosen in preference to an alternative

Question 8

absorption costing vs relevant costing

Answer 8

relevant costing tends to look at short term decision making, absorption tends to be production decisions (longer term when all costs are variable)

Question 9

total costs =

Answer 9

fixed costs + variable costs

Question 10

Marginal cost =

Answer 10

cost of one additional unit of a good or service (therefore marginal cost is the variable cost)

Question 11

marginal costing decision making

Answer 11

under marginal costing fixed costs are ignored and decisions are based on marginal costs

Question 12

contribution =

Answer 12

sales price - variable costs

Question 13

profit =

Answer 13

sales revenue - variable costs - fixed costs = contribution - fixed costs

Question 14

why are fixed costs not relevant to a decision

Answer 14

do not change, we are not interested in them in the short term, not interested if an activity is profitable just whether it makes a positive contribution towards fixed costs and profits

Question 15

what is the key decision maker in marginal costing

Answer 15

contribution the contact makes

Question 16

example of a variable costs

Answer 16

materials
labour
manufacturing overheads are NOT variable

Question 17

what should be the decision when accepting special orders at lower price

Answer 17

where there is spare capacity and the contract will make a positive contribution to fixed costs and profits should be considered, but need to be assured that true price paid by others is not affected

Question 18

a one off order can be considered if

Answer 18

it will utilise unused capacity for only a short period and capacity will then be released for use on more profitable opportunities

Question 19

General rule for outsourcing

Answer 19

if the variable cost is lower than the outsourcing price then it is more profitable to manufacture in house

Question 20

when adding on opportunity cost to which side do you add it

Answer 20

opportunity is sacrificed so add it to the one that does not provide the opportunity (cost of the missed opportunity)

Question 21

if a product x is dropped what is the profit lossed

Answer 21

the contribution per unit * number of units, the shared fixed costs would not change so this is ignored

Question 22

whether to drop a product line general rule

Answer 22

if a product makes a contribution it is generally worth keeping

Question 23

product x brings in revenue 32 and has variable costs 24, should it be dropped and the space rented out for 13

Answer 23

opportunity cost = 13, relevant cost of x = 13 + 24 = 37

contribution of x = 32 - 37 = (5) therefore no longer worthwhile

Question 24

in the long term what are all costs

Answer 24

variable