QUESTION: 305 Topic 5: Part 2 Sec Five (258 to 317)

A printing company is considering replacing an old printing press. The old printing press has a book value of $24,000 and a trade-in value of $14,000. A new printing press would cost $85,000 after trade-in of the old press. It is estimated that the new printing press would reduce operating costs by $20,000 per year. If the company decides not to purchase the new press, the $85,000 could instead be used to retire debt that is currently costing $9,000 per year in interest. Which of the given is an example of a sunk cost?

The book value of the old printing press.
The trade-in value of the old printing press.
The estimated reduction in operating costs.
The interest on the existing debt.

Answer(s): A

Explanation:

A sunk cost is a cost already incurred or committed to be incurred. Consequently, sunk costs are not relevant to decision making because they cannot be affected by the choices made. The old machine's book value of $24,000 is an outlay made in the past that cannot be changed.

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QUESTION: 306 Topic 5: Part 2 Sec Five (258 to 317)

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There is a market for both product X and product Y. Which of the following costs and revenues would be most relevant in deciding whether to sell product X or process it further to make product Y?

Total cost of making X and the revenue from sale of X and Y.
Total cost of making Y and the revenue from sale of Y.
Additional cost of making Y, given the cost of making K and additional revenue from Y.
Additional cost of making K given the cost of making Y, and additional revenue from Y.

Answer(s): C

Explanation:

Incremental costs are the additional costs incurred for accepting one alternative rather than another. Questions involving incremental costing (sometimes called differential costing) decisions are based upon a variable costing analysis. The typical problem for which incremental cost analysis can be used involves two or more alternatives, for example, selling or processing further. Thus, the relevant costs and revenues are the marginal costs 11and marginal revenues.

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QUESTION: 307 Topic 5: Part 2 Sec Five (258 to 317)

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Which costs are relevant to the decision to further process a product beyond its current state?

Joint costs.
Incremental costs.
Absorption costs.
Fixed factory overhead.

Answer(s): B

Explanation:

Incremental costs are the additional costs incurred by choosing one option rather than another. Questions involving incremental costing (sometimes called differential costing) decisions are based upon a direct (variable) costing analysis. The typical problem for which incremental cost analysis can be used involves two or more options. Incremental costing is applicable to decisions concerning special orders, making or buying a component, and adding or dropping product lines. Caution must always be used in applying incremental cost analysis because of the many non quantitative factors that must be considered. Management accountants are frequently asked to analyze various decision situations, including the following:
I). The cost of a special device that is necessary if a special order is accepted. II). The cost proposed annually for the plant service for the grounds at corporate headquarters.
Ill). Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.
IV). The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
V). The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

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QUESTION: 308 Topic 5: Part 2 Sec Five (258 to 317)

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The costs described in situations land IV are

Prime costs.
Sunk costs.
Discretionary costs.
Relevant costs.

Answer(s): D

Explanation:

Incremental costing can be used in making decisions regarding the acceptance of special orders and make-or-buy decisions. Many quantitative and non-quantitative factors are involved in such decisions. The first step is to determine which costs are relevant to the decision. A relevant cost is any cost that will differ depending upon the decision made. The costs described in situations I and IV are relevant costs. In situation I, the cost can be avoided if the special order is not accepted. In situation IV, an opportunity cost is associated with the "make" alternative.
Management accountants are frequently asked to analyze various decision situations, including the following:
I). The cost of a special device that is necessary if a special order is accepted. II). The cost proposed annually for the plant service for the grounds at corporate headquarters.
Ill). Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.
IV). The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
V). The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

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QUESTION: 305 Topic 5: Part 2 Sec Five (258 to 317)

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QUESTION: 306 Topic 5: Part 2 Sec Five (258 to 317)

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QUESTION: 307 Topic 5: Part 2 Sec Five (258 to 317)

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QUESTION: 308 Topic 5: Part 2 Sec Five (258 to 317)

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