Which one of the following costs would be relevant in short-term decision making?
Answer(s): A
Relevant costs are those future costs that differ among the options. Incremental or differential cost is the difference in total cost between two decisions. Consequently, incremental fixed cost is a relevant cost.
When a decision is made in an organization, it is selected from a group of alternative courses of action. The loss associated with choosing the alternative that does not maximize the benefit is the
Answer(s): C
Opportunity' cost is the maximum benefit obtainable from the next best alternative use of a resource. It is the benefit given up by not selecting that option.
The segmented income statement for a retail company with three product lines is presented below:The company buys the goods in the three product lines directly from manufacturers' representatives. Each product line is directed by a manager whose salary is included in the administrative expenses. Administrative expenses are allocated to the three product lines equally because the administration is spread evenly among the three product lines. Salaries represent payments to the workers in each product line and therefore are traceable costs of each product line. Advertising promotes the entire company rather than the individual product lines. As a result, the advertising is allocated to the three product lines in proportion to the sales revenue. Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent represents the cost of the retail store and warehouse under a lease agreement with 5 years remaining. The product lines share the retail and warehouse space, and the rent is allocated to the three product lines based on the square footage occupied by each of the product lines. The company buys the goods in the three product lines directly from manufacturers' representatives. Each product line is directed by a manager whose salary is included in the administrative expenses. Administrative expenses are allocated to the three product lines equally because the administration is spread evenly among the three product lines. Salaries represent payments to the workers in each product line and therefore are traceable costs of each product line. Advertising promotes the entire company rather than the individual product lines. As a result1 the advertising is allocated to the three product lines in proportion to the sales revenue. Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent represents the cost of the retail store and warehouse under a lease agreement with 5 years remaining. The product lines share the retail and warehouse space, and the rent is allocated to the three product lines based on the square footage occupied by each of the product lines. The segmented income statement for this retail company does not facilitate performance evaluation because it does not distinguish between controllable and uncontrollable costs. The only costs and expenses controllable at the product-line level for this retail company are
Commissions, cost of sales, and salaries are all traceable to each of the product lines and are therefore controllable. Administrative expenses are common or corporate-level expenses, advertising does not promote a specific product line, and rent is paid on a building shared by all product lines.
Controllable costs
Answer(s): B
Controllable costs can be changed by action taken at the appropriate management (responsibility) level. All costs are controllable, but they are controlled at different management levels; e.g., the decision to build another plant is made at a higher level of management than the decision to buy office supplies.
Conversion costs do not include
Conversion costs are necessary to convert raw materials into finished products. They include all manufacturing costs, for example, direct labor and factory overhead, other than direct materials.
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