Management Accounting Information For Activity and Process Decisions

CHAPTER 5
MANAGEMENT ACCOUNTING INFORMATION

FOR ACTIVITY AND PROCESS DECISIONS
TRUE/FALSE
1. Sunk costs are never relevant costs for decision making.

a. True
b. False
2. An example of a sunk cost is the amount of a guaranteed contract that has not yet been
paid.
a. True
b. False
3. Personal employee responses are not critical considerations for the business decision
maker.
a. True
b. False
4. For decision-making, differential costs assist in choosing between alternatives.

a. True
b. False
5. For a particular decision, differential revenues and costs are always relevant.
a. True
b. False
6. A cost may be relevant for one decision, but not relevant for a different decision.
a. True
b. False
7. Avoidable costs should be evaluated when deciding whether to discontinue a part, product,
product line, or business segment.
a. True
b. False
8. In make-or-buy decisions, facility-sustaining support costs are unavoidable if the facility

can be converted to another use.
a. True
b. False
9. For one-time-only special orders, flexible costs may be relevant but not capacity-related
costs.
a. True
b. False
AKY 4E Test Bank Chapter 5 Page 1 Schoenebeck

10. Bid prices and costs that are relevant for regular orders are the same costs that are relevant
for one-time-only special orders.
a. True
b. False
11. When opportunity costs exist, they are always relevant.

a. True
b. False
12. Depreciation allocated to a product line is a relevant cost when deciding to discontinue that
product.
a. True
b. False
13. When replacing an old machine with a new machine, the book value of the old machine is
a relevant cost.
a. True
b. False
14. If a company is deciding whether to outsource a part, the reliability of the supplier is an
important factor to consider.
a. True
b. False
15. Sometimes qualitative factors are the most important factors in make-or-buy decisions.
a. True
b. False
16. If a company is deciding whether to outsource a part, the reliability of the supplier is an
important factor to consider.
a. True
b. False
17. Outsourcing is risk-free to the manufacturer because the supplier now has the responsibility
of producing the part.
a. True
b. False
18. The central goal of the facility layout design process is to streamline operations to increase
operating income.
a. True
b. False
19. In a process layout, batch production causes inventory costs.

a. True
b. False

20. The reduction of setup costs makes smaller batch sizes more feasible.
a. True
b. False
21. In batch processing, workers downstream can identify an upstream problem immediately.
a. True
b. False
22. The theory of constraints focuses on long-term initiatives to increase operating income.
a. True
b. False
23. A processing cycle efficiency (PCE) of 14% indicates better efficiency than a PCE of 50%.
a. True
b. False
24. When using a just-in-time manufacturing, a problem anywhere in the system can stop all
production.
a. True
b. False
25. Implementing a just-in-time inventory system requires a major cultural change for an
organization.
a. True
b. False
26. Global competition led to the development of international quality standards such as ISO
9000 2000 Standards.
a. True
b. False
27. External quality problems are expensive to fix.

a. True
b. False
28. Experience shows that it is more expensive to prevent defects than to detect and repair
them.
a. True
b. False

MULTIPLE CHOICE
29. Sunk costs:

a. are relevant
b. are differential
c. have future implications
d. are ignored when evaluating alternatives
30. A computer system installed last year is an example of:

a. a sunk cost
b. a relevant cost
c. a differential cost
d. an avoidable cost
31. Costs that cannot be changed by any decision made now or in the future are:
a. fixed costs
b. indirect costs
c. avoidable costs
d. sunk costs
32. For decision making, a listing of the relevant costs:

a. will help the decision maker concentrate on the pertinent data
b. will only include future costs
c. will only include costs that differ among alternatives
d. should include all of the above
33. Which of the following costs are NEVER relevant in the decision-making process?
a. capacity-related
b. historical costs
c. relevant costs
d. variable costs
34. When deciding to lease a new cutting machine or continue using the old machine, the
following costs are all relevant EXCEPT the:
a. $50,000 cost of the old machine
b. $20,000 cost of the new machine
c. $10,000 selling price of the old machine
d. $3,000 annual savings in operating costs if the new machine is purchased
35. In evaluating different alternatives, it is useful to concentrate on:

a. flexible costs
b. capacity-related costs
c. total costs
d. relevant costs

36. Relevant costs of a make-or-buy decision include all EXCEPT:
a. fixed salaries that will not be incurred if the part is outsourced
b. current direct material costs of the part
c. special machinery for the part that has no resale value
d. material-handling costs that can be eliminated
37. Which of the following would NOT be considered in a make-or-buy decision?

a. capacity-related costs that will no longer be incurred
b. flexible costs of production
c. potential rental income from space occupied by the production area
d. unchanged supervisory costs
38. Relevant costs in a make-or-buy decision of a part include:

a. setup overhead for the manufacture of the product using the outsourced part
b. currently used manufacturing capacity that has alternative uses
c. annual plant insurance costs that will remain the same
d. corporate office costs that will be allocated differently
39. When deciding to accept a one-time-only special order from a wholesaler, management
should do all of the following EXCEPT:
a. analyze product costs
b. consider the impact of the special order on future prices of their products
c. determine whether excess capacity is available
d. verify past design costs for the product
40. When there is excess capacity, it makes sense to accept a one-time-only special order for
less than the current selling price when:
a. incremental revenues exceed incremental costs
b. additional capacity-related costs must be incurred to accommodate the order
c. the company placing the order is in the same market segment as your current
customers
d. 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 idle
b. reallocation of corporate costs
c. how total costs differ among alternatives
d. operating income per unit of the discontinued segment
42. Costs are relevant to a particular decision if they:

a. are flexible costs
b. are capacity-related costs
c. differ across the alternatives being considered
d. remain unchanged across the alternatives being considered

THE 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 van
Original cost $100,000 $180,000
Annual operating cost $ 35,000 $ 20,000
Accumulated depreciation $ 60,000 ---
Current salvage value of the existing van $ 45,000 ---
Remaining life 10 years 10 years
Salvage value in 10 years $ 0 $ 0
Annual depreciation $ 4,000 $ 18,000
43. Sunk costs include:

a. the original cost of the existing van
b. the original cost of the new van
c. the current salvage value of the existing van
d. the annual operating cost of the new van
44. Relevant costs for this decision include:

a. the original cost of the existing van
b. accumulated depreciation
c. the current salvage value of the existing van
d. the salvage value in 10 years
45. If Flowers-For-Everyone replaces the existing delivery van with the new one, over the next
10 years operating income will:
a. decrease by $180,000
b. increase by $150,000
c. decrease by $150,000
d. None of the above is correct.
46. Should Flowers-for-Everyone replace the existing van with the new van? What are the
savings or additional cost?
a. Yes replace, net savings of $15,000
b. Yes replace, net savings of $150,000
c. No replace, additional costs of $120,000
d. No replace, additional costs of $30,000

THE 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 Civic
Acquisition cost $15,000 $3,000
Repairs $ 3,000 ---
Annual operating costs
(Gas, maintenance, insurance) $ 2,280 $2,100
47. The cost(s) NOT relevant for this decision is(are):

a. the acquisition cost of the Geo Prizm
b. the acquisition cost of the Honda Civic
c. the repairs to the Geo Prizm
d. the annual operating costs of the Honda Civic
48. What should Jim do? What are his savings in the first year?
a. Buy the Honda Civic; $9,780
b. Fix the Geo Prizm; $5,518
c. Buy the Honda Civic; $180
d. Fix the Geo Prizm; $5,280

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 $ 40,000
Direct labor 10,000
Flexible support costs 30,000
Capacity-related support costs 20,000
Total costs $100,000
It 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 outside supplier, the monthly
avoidable costs (costs that will no longer be incurred) total:
a. $ 82,000
b. $ 98,000
c. $ 50,000
d. $100,000

50. If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per
month, then its monthly operating income will:
a. increase by $2,000
d. decrease by $85,000
51. The maximum price that Konrade’s Engine Company should be willing to pay the outside
supplier is:
a. $80 per TE456 part
b. $82 per TE456 part
c. $98 per TE456 part
d. $100 per TE456 part

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 $0.25
Direct labor 0.03
Unit-related support costs 0.10
Batch-related support costs 0.12
Product-sustaining support costs 0.22
Facility-sustaining support costs 0.28
Total cost per jar $1.00
52. The relevant cost per jar is:

a. $0.28 per jar
b. $0.38 per jar
c. $0.72 per jar
d. $1.00 per jar
53. The maximum price that Melodee’s Preserves should be willing to pay for the decorative
jars is:
a. $0.28 per jar
b. $0.38 per jar
c. $0.72 per jar
d. $1.00 per jar

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 $24,000
Flexible costs 36,000 48,000 15,000
Contribution margin 24,000 42,000 9,000
Capacity-realted costs:
Avoidable 9,000 18,000 6,000
Unavoidable 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:
55. Assuming Product C is discontinued and the space formerly used to produce Product C is
rented for $12,000 per year, operating income will:
c. increase by $12,000
d. increase by $14,400
56. Which of the following does NOT need to be considered when evaluating a make-or-buy
decision?
a. savings from an alternative use of the production equipment
b. the original cost of the production equipment
c. the quality of the supplier's product
d. the reliability of the delivery schedule
57. When making decisions:

a. quantitative factors are the most important
b. qualitative factors are the most important
c. appropriate weight must be given to both quantitative and qualitative factors
d. both quantitative and qualitative factors are unimportant
58. Employee morale at Dos Santos, Inc., is very high. This type of information is known as:
a. a qualitative factor
b. a quantitative factor
c. a differential factor
d. an opportunity cost

59. Which of following are risks of outsourcing the production of a part?
a. unpredictable quality
b. unreliable delivery
c. unscheduled price increases
d. 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 price
b. the responsibility for on-time delivery is now the responsibility of the supplier
c. building close relationships with the supplier
d. 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 be
considered?
a. alternative uses of the production capacity
b. the original cost of the production equipment
c. the quality of the supplier's product
d. the reliability of the supplier's delivery schedule
62. In __________, all similar equipment or functions are grouped together.

a. a process layout
b. a product layout
c. cellular manufacturing
d. just-in-time production
63. Characteristics of a process layout include:
a. continuous processing
b. long production paths
c. small amounts of inventory
d. no work-in-process storage areas
64. In _______, equipment is organized to accommodate the production of a specific product.
a. a process layout
b. a product layout
65. Characteristics of a product layout include:
a. raw materials and purchased parts are delivered directly to the production line where
they are needed
b. low-volume production
c. a U-shaped layout
d. small batches of unique products

66. In __________, the plant is organized into areas where all machines used to manufacture a
group of similar products are close to each other.
a. a process layout
b. a product layout
67. Characteristics of cellular manufacturing include:
a. a layout that is usually circular like a cell
b. increasing the number of employees needed to produce a product
c. individual areas for employees so each can work independently without interruption
d. a flexible layout that can be easily adjusted to make a different product
68. The theory of constraints:
a. emphasizes long-term optimization
b. maintains that maximizing volume through production bottlenecks will increase
operating income
c. helps managers make special one-time decisions
d. suggests that some component parts should be outsourced
69. Constraints may include:

a. the availability of direct materials in manufacturing
b. linear square feet of display space for a retailer
c. direct labor in the service industry
d. All of the above are correct.

Braun’s Brakes manufactures 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 $70
Direct materials 6 6 6
Direct labor ($12 per hour) 12 12 24
Variable support costs ($4 per machine-hour) 4 8 8
Fixed support costs 10 10 10
70. Which model has the greatest contribution margin per unit?
a. Model X
b. Model Y
c. Model Z
d. both Models X and Y
71. Which model has the greatest contribution margin per machine-hour?
a. Model X
b. Model Y
c. Model Z
d. both Models Y and Z

72. If there is excess capacity, which model is the most profitable to produce?
a. Model X
b. Model Y
c. Model Z
d. both Models X and Y
73. If there is a machine breakdown, which model is the most profitable to produce?
a. Model X
b. Model Y
c. Model Z
d. both Models Y and Z
74. 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 per
constrained resource.
d. Both (b) and (c) are correct.
75. High levels of inventory result in all EXCEPT:

a. high moving, handling, and storage costs
b. increased product obsolescence and damage
c. increased financing costs
d. idle facilities
76. The implementation of just-in-time production results in all of the following EXCEPT:
a. decreased cycle times
b. reduced amount of waste
c. a slower pace for employees
d. structural changes
77. Characteristics of just-in-time manufacturing include all of the following EXCEPT:
a. the ability to process items in large batches
b. making a product only when the customer requires it
c. no work-in-process inventories
d. a problem anywhere can stop production
78. Measures of JIT (just-in-time) manufacturing reliability include all of the following
EXCEPT:
a. defect rates
b. labor and machine utilization ratios
c. cycle times
d. percent of on-time deliveries
79. Of the four quality costing categories, the most damaging category to the organization is:
a. prevention costs
b. appraisal costs
c. internal failure costs
d. external failure costs

80. __________ are incurred when a defective component is discovered before shipment to the
customer.
a. Prevention costs
b. Appraisal costs
c. Internal failure costs
d. External failure costs
81. _________ are incurred when a customer discovers a defect.

a. Prevention costs
b. Appraisal costs
82. Training employees in methods to maintain quality is an example of __________.
a. prevention costs
b. appraisal costs
c. internal failure costs
d. external failure costs
83. __________ include the cost of raw-materials inspections and assembly-line inspections.
a. Prevention costs
b. Appraisal costs

Umberger Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells.
The following estimates have been prepared to evaluate the benefits from the reorganization:
Before the change After the change
Total annual sales $600,000 $800,000
Costs 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 are
projected to decrease inventory carrying costs by:
a. $12,500
b. $ 9,000
c. $ 6,000
d. $ 3,500
85. As a result of the layout reorganization, incremental manufacturing costs are projected to:
86. As a result of switching to a cellular manufacturing operation, total benefits are projected
to increase by:
a. $216,500
b. $200,000
c. $183,500
d. $176,500
87. 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 flow
b. of lower financing costs and the reduced need for storage and handling
c. larger batches can be processed faster and more efficiently
88. After the change, direct labor costs as a percentage of sales are projected to decrease
because:
a. less work-in-process inventory needs to be moved from location to location
b. fewer employees are needed to produce a product due to the new work design
c. less supervisors are needed to oversee operations

Vander Belt Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells.
The following estimates have been prepared to evaluate the benefits from the reorganization:
Costs as percentage of sales:
Direct labor 8% 7%
Support costs 12% 6%
Work-in-process inventory $100,000 $ 80,000
89. As a result of the layout reorganization, reduced levels of work-in-process inventory are
projected to decrease inventory carrying costs by:
a. $ 2,200
b. $ 7,500
c. $ 8,800
d. $11,000
90. As a result of the layout reorganization, incremental manufacturing costs are projected to:
a. decrease by $22,800
b. decrease by $25,000
c. increase by $25,000
d. increase by $40,000
91. As a result of switching to a cellular manufacturing operation, total benefits are projected
to increase by:
a. $222,800
b. $227,200
c. $272,800
d. $277,200
92. After the change, sales are projected to increase because:

a. of shorter delivery lead times
b. of higher sales prices
c. of the ability to process larger batch sizes
93. After the change, work-in-process carrying costs are projected to decrease because of:
a. reduced costs in materials handling
b. lower financing costs
c. the decreased need for inventory storage

EXERCISE / PROBLEM
94. Karen’s Cookie Company is considering replacing its giant cookie mixer with a new one.
The following data have been compiled to evaluate the decision.
Existing New
Original cost $8,000 $10,000
Annual operating cost $4,000 $2,200
Disposal 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 new
cookie mixer?
95. Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo
Ovens Manufacturing announced the availability of a new convection oven that cooks
more 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 Oven

Original cost $60,000 $50,000
Accumulated depreciation $ 5,000 ---
Current salvage value $40,000 ---
Annual operating expenses $10,000 $ 7,500
Disposal 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 the
new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this
decision?

96. Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are
produced each year with production costs as follows:
Direct materials $ 45,000

Direct labor 15,000
Flexible support costs 35,000
Capacity-related support costs 25,000
Total costs $120,000
Quiett 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 it
currently manufactures?
97. Freddie’s Fudge Factory currently makes fudge for retail and mail order customers. It also
offers 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 labor 0.06
Unit-related support costs 0.10
Batch-related support costs 0.04
Product-sustaining support costs 0.05
Facility-sustaining support costs 0.15
Total cost per pound $0.90
Required:
a. Should Freddie’s Fudge Factory outsource the roasted nuts? Why or why not?
Discuss all items that should be considered.
b. What incentives can Freddie offer the supplier of the roasted nuts to encourage
continued reliability?

98. Kirkland Company manufactures a part for use in its production. When 10,000 items are
produced, the costs per unit are:

Direct manufacturing labor 3.00
Flexible manufacturing support 1.20
Fixed manufacturing support 1.60
Total $6.40
Mike 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 $ 12
Direct manufacturing labor 60
Flexible manufacturing support 24
Fixed manufacturing support 32
Total $128
Monty 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 a savings
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 the
reorganization:
Costs as percentage of sales:
Direct labor 6% 4%
Support costs 9% 7%
Work-in-process inventory $200,000 $120,000
Required:
a. Why do the layout reorganization estimates include
1. 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 projected

1. from carrying reduced levels of work-in-process inventory?
2. for incremental manufacturing costs?
3. in total benefits?

CRITICAL THINKING / ESSAY
101. Are sunk costs considered relevant when choosing among alternatives? Explain.
102. Explain what revenues and costs are relevant when choosing among alternatives.
103. Assume you are a sophomore in college and are committed to earning an undergraduate
degree. Your current decision is whether to finish college in four consecutive years or take
a year off and work for some extra cash.
a. Identify at least two revenues or costs that are relevant to making this decision.
Explain why each is relevant.
b. Identify at least two costs that would be considered sunk costs for this decision.
c. Comment on at least one qualitative consideration for this decision.
104. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy
appeal with an outdated décor that is still in good condition, menus and carpet that need to
be replaced anyway, and loyal customers.
Identify for the restaurant management

a. those costs that are relevant to this decision,
b. those costs that are not differential,
c. and qualitative considerations.
105. Are relevant revenues and costs the only information needed by managers to select among
alternatives? Explain using examples.
106. Explain the differences between a process layout, a product layout, and cellular
manufacturing.
107. A motorcycle manufacturer is currently using a conventional processing system. Recently

work-in-process has been piling up at two stations along the assembly line. To eliminate
this problem, management discussed the possibility of implementing just-in-time
manufacturing. Discuss the advantages and concerns of implementing JIT.
108. In a just-in-time inventory system, explain

a. why suppliers become very important to the overall manufacturing process, and
b. what incentives can be offered to reward good suppliers.
109. Discuss the implications to employees of changing from a conventional manufacturing

system to just-in-time production.
110. Discuss cost reductions that can result from reducing work-in-process inventory.
111. Snowboarding is a sport with a great amount of risk involved. On which type of quality
costs should the snowboard manufacturer concentrate? Which costs should not be relied
on? Explain why.

CHAPTER 5 SOLUTIONS
MANAGEMENT ACCOUNTING INFORMATION
FOR ACTIVITY AND PROCESS DECISIONS
TRUE/FALSE MULTIPLE CHOICE
LO1 1. a LO1 29. d LO3 61. b

LO1 2. a LO1 30. a LO4 62. a
LO1 3. b LO4 63. b
LO2 4. a LO1 31. d LO4 64. b
LO2 5. a LO2 32. d LO4 65. a
LO2 33. b
LO2 6. a LO2 34. a LO4 66. c
LO2 7. a LO2 35. d LO4 67. d
LO2 8. b LO5 68. b
LO2 9. a LO2 36. c LO5 69. d
LO2 10. b LO2 37. d LO5 70. b
LO2 38. b
LO2 11. a LO2 39. d LO5 71. a
LO2 12. b LO2 40. a LO5 72. b
LO2 13. b LO5 73. a
LO3 14. a LO2 41. c LO5 74. c
LO3 15. a LO2 42. c LO6 75. d
LO1 43. a
LO3 16. a LO2 44. c LO6 76. c
LO3 17. b LO2 45. b LO6 77. a
LO4 18. a LO6 78. b
LO4 19. a LO2 46. a LO7 79. d
LO4 20. a LO2 47. a LO7 80. c
LO2 48. c
LO4 21. a LO2 49. a LO7 81. d
LO5 22. b LO2 50. c LO7 82. a
LO6 23. b LO7 83. b
LO6 24. a LO2 51. b LO8 84. d
LO6 25. a LO2 52. d LO8 85. b
LO2 53. d
LO7 26. a LO2 54. c LO8 86. c
LO8 27. a LO2 55. b LO8 87. a
LO8 28. b LO8 88. b
LO3 56. b LO8 89. a
LO3 57. c LO8 90. c
LO3 58. a
LO3 59. d LO8 91. b
LO3 60. c LO8 92. a
LO8 93. d

MULTIPLE CHOICE
45. New van ($20,000 x 10 years) – Existing van ($35,000 x 10 years) = $150,000 less in
operating costs, which results in a $150,000 increase in operating income.
46. New van ($180,000) + $45,000 + (-$20,000 x 10 years) = costs of ($335,000)
Existing van (-$35,000 x 10 years) = costs of ($350,000)
Replacement results in net savings of $15,000
48. Geo ($3,000 + $2,280) - Honda ($3,000 + $2,100) = $180 cost savings with the Honda
option
49. $40,000 + $10,000 + $30,000 + ($20,000 x 10%) = $82,000
50. Avoidable costs $82,000 – ($85 x 1,000 units) = decrease of $3,000
51. Avoidable costs $82,000 / 1,000 units = $82 per part
52. All avoidable costs are relevant for this decision.
53. Considering only quantitative factors, the company should not pay more than the avoidable
costs of $1.00 per jar. There may be qualitative factors that are also important.
54. $24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate
profits. Without Product C, operating income would be $3,000 less than currently reported.
55. $(3,000) + $12,000 = $9,000
70. Model X $50 - $6 - $12 - $4 = $28
Model Y $60 - $6 - $12 - $8 = $34 **highest
Model Z $70 - $6 - $24 - $8 = $32
71. Model X $50 - $6 - $12 - $4 = $28 / 1 = $28 **highest
Model Y $60 - $6 - $12 - $8 = $34 / 2 = $17
Model Z $70 - $6 - $24 - $8 = $32 / 2 = $16
72. Model Y since it has the greatest contribution margin per unit
73. Model X since it has the greatest contribution margin per machine-hour
84. (Before: $125,000 x 10%) less (After: $90,000 x 10%) equals cost savings of $3,500.
85. (Before: $600,000 x 50%) less (After: $800,000 x 40%) equals additional costs of $20,000.
86. Before the After the
Change Change Difference
Sales $600,000 $800,000 $200,000
Manufacturing costs (300,000) (320,000) (20,000)
WIP inventory carrying costs (12,500) (9,000) 3,500
Total benefits $287,500 $471,000 $183,500
89. (Before: $100,000 x 11%) less (After: $80,000 x 11%) equals cost savings of $2,200.
90. (Before: $500,000 x 40%) less (After: $750,000 x 30%) equals additional costs of $25,000.
91. Before the After the
Sales $500,000 $750,000 $250,000
Manufacturing costs (200,000) (225,000) (25,000)
WIP inventory carrying costs (11,000) (8,800) 2,200
Total benefits $289,000 $516,200 $227,200

EXERCISE/PROBLEM
LO1,2
94. a. Relevant costs include the acquisition cost of the new giant cookie mixer, annual
operating costs for both the old and the new cookie mixers, and the current disposal
value of the old mixer.
b. Sunk costs include the original cost of the existing cookie mixer.
c. Net cash flows over 5 years with the giant cookie mixer:
Cash inflow:
Decrease in annual operating expenses ($1,800 x 5) $ 9,000
Sale of the existing cookie mixer 3,000
Cash outflow:
Acquisition of the new giant cookie mixer (10,000)
Net cash inflow (outflow) $ 2,000
LO1,2,3
95. a. Sunk costs include the original cost of the existing convection oven and the
accompanying accumulated depreciation.
b. Relevant costs include:
Acquisition cost of the new Turbo oven
Current disposal value of the existing convection oven
Annual operating expenses for the existing and the new Turbo oven
c. Net cash flows over 5 years with the new Turbo oven:
Cash inflow:
Decrease in annual operating expenses ($2,500 x 5) $ 12,500
Sale of the existing oven 40,000
Cash outflow:
Acquisition of the new Turbo oven (50,000)
Net cash inflow (outflow) $ 2,500
d. Other items the manager should consider when making this decision include:
 The Turbo Oven’s reliability and efficiency is still unknown since it is a
brand new product.
 If the Turbo Oven bakes faster as it claims, the Pizzeria may be able to
increase sales due to the quicker baking time.
 Even though purchasing another oven just six months prior, top
management should consider the Turbo oven option, but they may also
question the decision-making ability of Pat, the current manager.

LO2,3
96. a. Avoidable costs are those costs eliminated when a part, product, product line, or
business segmented is discontinued. Avoidable production costs for WB23 total
$110,000, which are all but the $10,000 ($25,000 x 40%) of capacity-related costs
that cannot be immediately converted to other uses.
b. Based on the financial considerations given, Quiett Truck should NOT outsource
WB23 because the $112,000 (10,000 units x $11.20 per part) outsourced cost is
greater than the $110,000 reduction in annual production costs. In other words, the
outsourcing would cost Quiett Truck an additional $2,000 annually.
c. Other factors to consider include the supplier’s ability to meet expected quality and
delivery standards, and the likelihood of suppliers increasing prices of components in
the future.
LO2,3
97. a. Because Freddie’s Fudge Factory can make use of the roasting space, it can be
assumed the facility-sustaining support costs are avoidable. Assuming the unit-
related, batch-related, and product-sustaining support costs are also all avoidable
costs, YES, Freddie’s Fudge should outsource the nuts because the $0.85 per pound
of the supplier is less than the current $0.90 per pound cost to Freddie.
b. Freddie can offer the supplier prompt payment and a guaranteed total purchase
volume to encourage continued reliability.

LO1,2
98. a. Direct materials $0.60
Direct manufacturing labor 3.00
Flexible manufacturing support 1.20
Avoidable fixed support 1.00
Total relevant per unit costs $5.80
b. Make Buy Effect of Buying

Purchase price $60,000 $(60,000)
Savings in space (9,000) 9,000
Direct materials $6,000 6,000
Direct mfg. labor 30,000 30,000
Flexible support 12,000 12,000
Fixed support saved (10,000) 10,000
Totals $48,000 $41,000 $7,000
The best alternative is to buy the part.
LO1,2
99. a. Direct materials $12
Direct manufacturing labor 60
Flexible manufacturing support 24
Avoidable fixed support 20
Total relevant per unit costs $116
b. Make Buy Effect of Buying

Purchase price $1,200,000 $(1,200,000)
Savings in space (180,000) 180,000
Direct materials $120,000 120,000
Direct manufacturing labor 600,000 600,000
Flexible support 240,000 240,000
Fixed support saved (200,000) 200,000
Totals $960,000 $820,000 $140,000
The best alternative is to buy the part.

LO4,8
100. a. 1. Layout reorganization estimates include a decrease in work-in-process
inventory because cellular manufacturing streamlines production flows. When
products flow immediately from one processing stage to the next, there is less
build-up of work-in-process inventories.
2. When products flow immediately from one processing stage to the next,
workers downstream can identify an upstream problem in that component
almost immediately and correct it before it leads to the production of more
defective components. Early detection of defective units reduces the amount of
raw materials needed for rework, which results in decreased direct material
costs as a percentage of sales.
3. A streamlined manufacturing operation leads to reduced manufacturing cycle
times, improved quality, and a shorter lead-time for orders. Quicker delivery to
customers and higher quality products usually result in increased customer
sales.
b. 1. Carrying reduced levels of work-in-process inventory results in a projected cost

savings of $9,600.
Before the change: $200,000 x 12% = $24,000
After the change: $120,000 x 12% = 14,400
Cost savings $ 9,600
2. As a result of the layout reorganization, incremental manufacturing costs are

projected to decrease by $5,000.
Before the change: $700,000 x 25% = $175,000
After the change: $850,000 x 20% = 170,000
Cost savings $ 5,000
3. As a result of switching to a cellular manufacturing operation, total benefits are

projected to increase by $164,600.
Before the After the

Sales $700,000 $850,000 $150,000
Manufacturing costs* (175,000) (170,000) 5,000
WIP inventory carrying costs** (24,000) (14,400) 9,600
Total benefits $501,000 $665,600 $164,600
* Before the change: $700,000 x (10% + 6% + 9%) = $175,000

After the change: $850,000 x (9% + 4% + 7%) = $170,000
** Before the change: $200,000 x 12% = $24,000
After the change: $120,000 x 12% = $14,400

CRITICAL THINKING / ESSAY
LO1
101. Are sunk costs considered relevant when choosing among alternatives? Explain.
Solution: No. Amounts that remain the same among alternatives do not add useful
information for selecting an alternative, and therefore, are not considered relevant for
decision making. Sunk costs by definition are those costs that have already been
committed, cannot be changed, and will never differ among alternatives.
LO2
102. Explain what revenues and costs are relevant when choosing among alternatives.
Solution: Amounts that differ among alternatives are considered relevant. Amounts that
remain the same among alternatives do not add useful information for selecting an
alternative, and therefore, are not considered relevant for decision making.
LO2,3
103. Assume you are a sophomore in college and you are committed to earning an
undergraduate degree. Your current decision is whether to finish college in four
consecutive years or take a year off and work for some extra cash.
a. Identify at least two revenues or costs that are relevant to making this decision.
Explain why each is relevant.
b. Identify at least two costs that would be considered sunk costs for this decision.
c. Comment on at least one qualitative consideration for this decision.
Solution:
a. Relevant revenues/costs are those that differ between the alternatives of continuing
with college or taking a year off from college and working. Relevant costs for
continuing your college education without a break include:
1. Earnings lost next year due to the hours you are not able to work because of
classes and homework.
2. As a result of graduating a year earlier, higher wages will be earned a year
earlier as well.
b. Sunk costs for this decision include:

1. Amounts paid for college tuition and books during the past two years.
2. Amounts committed for college tuition and books for the remaining two years.
c. A qualitative consideration would include having different activities and priorities

than your friends who are students, graduating later than students who started college
the same time you did, and retaining information over the year off from school.

LO2,3
104. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy
appeal with an outdated décor that is still in good condition, menus and carpet that need to
be replaced anyway, and loyal customers.
Identify for the restaurant management

a. those costs that are relevant to this decision,
b. those costs that are not differential,
c. and qualitative considerations.
Solution:
For the decision of whether to update the restaurant’s image:
a. Relevant costs include a one-time cost of the renovation for the updated image, a
change in future sales which includes an increase in sales due to the updated image,
decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed
or having a limited serving area during renovation.
b. Costs that are not differential include replacing the menus and the carpet since they
need to be replaced whether the image is updated or not.
c. Qualitative considerations include whether the restaurant will lose that cozy appeal it
currently has, if the restaurant needs to be closed for renovations it may result in loss
of customers, and new customers may not be the type of customer the restaurant
wants to attract.
LO3
105. Are relevant revenues and costs the only information needed by managers to select among
alternatives? Explain using examples.
Solution: No, relevant revenues and costs provide a financial analysis but they do not take
into consideration qualitative implications. In a make-or-buy decision, examples of
qualitative issues include the supplier’s ability to meet expected quality and delivery
standards and the likelihood that suppliers increase prices of the components in the future.

LO4
106. Explain the differences between a process layout, a product layout, and cellular
manufacturing.
Solution: In process layouts, all similar equipment and functions are grouped together.
Process layouts occur typically in organizations in which production is done in small
batches of unique products. In process layouts, products are moved and processed from
one area to another until the product is completed.
In contrast, in product layouts, equipment is organized to accommodate the production of a

specific product. Product layouts are most effective for companies producing high-volume
products. Typically products are moved and are processed along an assembly line.
Meanwhile, cellular manufacturing involves the organization of a plant into a number of

cells. Within each cell, machines that are needed to manufacture a group of similar
products are arranged close to one another. The organization reduces production cycle
time, which is the time from receipt of raw materials from the supplier to delivery of the
finished goods.
LO6
107. A motorcycle manufacturer is currently using a conventional processing system. Recently
work-in-process has been piling up at two stations along the assembly line. To eliminate
this problem, management discussed the possibility of implementing just-in-time
manufacturing. Discuss the advantages and concerns of implementing JIT.
Solution: The advantages of implementing just-in-time manufacturing include fewer
inventories, which generally result in reduced cycle time, improved quality, and reduced
waste.
Concerns include establishing and maintaining good relations with reliable suppliers and
the structural and cultural change in the work environment.
LO3,6
108. In a just-in-time inventory system, explain
a. why suppliers become very important to the overall manufacturing process, and
b. what incentives can be offered to reward good suppliers.
Solution:
a. In a just-in-time inventory system, suppliers are very important because if good
quality raw materials are not delivered in a timely manner, the entire processing
system will shut down.
b. Incentives that can be offered to reward good suppliers include prompt payment and
guaranteed total purchase volume.

LO6
109. Discuss the implications to employees of changing from a conventional manufacturing
system to just-in-time production.
Solution: With the implementation of a just-in-time system, employees have to adapt to a
new cultural work climate. Employees will have to adapt to structural changes in the work
place to accommodate JIT, a faster work pace, and the concept of teamwork. JIT often
relies on teamwork, which requires individuals that may have worked in isolation to
subordinate their interests to those of the team.
LO6
110. Discuss cost reductions that can result from reducing work-in-process inventory.
Solution: Decreasing work-in-process inventory results in reduced financing costs,
decreased storage and handling costs, and increased sales due to improved manufacturing
cycle times and shorter lead-time for orders.
LO7
111. Snowboarding is a sport with a great amount of risk involved. On which type of quality
costs should the snowboard manufacturer concentrate? Which costs should not be
considered? Explain why.
Solution: In regard to quality, snowboard manufacturers should concentrate on prevention
costs so that only high quality snowboards are manufactured. Emphasis should be placed
on quality engineering so the product is competitive and reliable. The use of external
failure costs could put the company out of business. Lawsuits regarding defective
snowboards causing or attributing to bodily injury on the ski slopes could ruin a snowboard
manufacturer by damaging its reputation or by awarding damages of such magnitude that
the costs would bankrupt the company.

Management Accounting Information For Activity and Process Decisions

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Management Accounting Information For Activity and Process Decisions

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CHAPTER 5

MANAGEMENT ACCOUNTING INFORMATION

1. Sunk costs are never relevant costs for decision making.

4. For decision-making, differential costs assist in choosing between alternatives.

8. In make-or-buy decisions, facility-sustaining support costs are unavoidable if the facility

AKY 4E Test Bank Chapter 5 Page 1 Schoenebeck

11. When opportunity costs exist, they are always relevant.

19. In a process layout, batch production causes inventory costs.

AKY 4E Test Bank Chapter 5 Page 2 Schoenebeck

27. External quality problems are expensive to fix.

AKY 4E Test Bank Chapter 5 Page 3 Schoenebeck

29. Sunk costs:

30. A computer system installed last year is an example of:

32. For decision making, a listing of the relevant costs:

35. In evaluating different alternatives, it is useful to concentrate on:

AKY 4E Test Bank Chapter 5 Page 4 Schoenebeck

37. Which of the following would NOT be considered in a make-or-buy decision?

38. Relevant costs in a make-or-buy decision of a part include:

42. Costs are relevant to a particular decision if they:

AKY 4E Test Bank Chapter 5 Page 5 Schoenebeck

43. Sunk costs include:

44. Relevant costs for this decision include:

AKY 4E Test Bank Chapter 5 Page 6 Schoenebeck

47. The cost(s) NOT relevant for this decision is(are):

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 49 THROUGH 51.

AKY 4E Test Bank Chapter 5 Page 7 Schoenebeck

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 AND 53.

52. The relevant cost per jar is:

AKY 4E Test Bank Chapter 5 Page 8 Schoenebeck

Product A Product B Product C

54. Denly Company is thinking of dropping Product C because it is reporting a loss.

57. When making decisions:

AKY 4E Test Bank Chapter 5 Page 9 Schoenebeck

60. Which of the following minimize the risks of outsourcing?

62. In __________, all similar equipment or functions are grouped together.

AKY 4E Test Bank Chapter 5 Page 10 Schoenebeck

69. Constraints may include:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 74.

AKY 4E Test Bank Chapter 5 Page 11 Schoenebeck

75. High levels of inventory result in all EXCEPT:

AKY 4E Test Bank Chapter 5 Page 12 Schoenebeck

81. _________ are incurred when a customer discovers a defect.

AKY 4E Test Bank Chapter 5 Page 13 Schoenebeck

Inventory carrying costs are estimated to be 10% per year.

AKY 4E Test Bank Chapter 5 Page 14 Schoenebeck

Inventory carrying costs are estimated to be 11% per year.

92. After the change, sales are projected to increase because:

AKY 4E Test Bank Chapter 5 Page 15 Schoenebeck

Existing New Turbo Oven

AKY 4E Test Bank Chapter 5 Page 16 Schoenebeck

Direct materials $ 45,000

Direct materials $0.50

AKY 4E Test Bank Chapter 5 Page 17 Schoenebeck

Direct materials $0.60

AKY 4E Test Bank Chapter 5 Page 18 Schoenebeck

Inventory carrying costs are estimated to be 12% per year.

b. As a result of the layout reorganization, what amount of change is projected

AKY 4E Test Bank Chapter 5 Page 19 Schoenebeck

Identify for the restaurant management

107. A motorcycle manufacturer is currently using a conventional processing system. Recently

108. In a just-in-time inventory system, explain

109. Discuss the implications to employees of changing from a conventional manufacturing