IMANET IMANET Certifications CMA Questions & Answers

• Question 481:

  In a manufacturing environment, the best short4erm profit maximizing approach would be to

  A. Maximize unit gross profit times the number of units sold.

  B. Minimize variable costs per unit times the number of units produced.

  C. Minimize fixed overhead cost per unit by producing at full capacity.

  D. Maximize contribution per unit times the number of units sold.

  Correct Answer: D

  In the short run, the best approach is to maximize the unit contribution margin (price - unit variable cost) times the units sold because fixed costs can be ignored. The important consideration is the total contribution margin available to cover fixed costs and contribute to profits.

• Question 482:

  When management must decide to accept or reject a one-time-only special order, given sufficient idle capacity, which one of the following is not relevant to the decision?

  A. Absorption costs.

  B. Differential costs.

  C. Direct costs.

  D. Variable costs.

  Correct Answer: A

  Management decision analysis is based on the concept of relevant costs. Relevant costs differ among decision choices. Thus, incremental or differential costs are always relevant. In special-order situations, given sufficient excess capacity, management is not concerned with full absorption costing because it includes certain product costs (fixed factory overhead) that will not change if the special order is accepted. The principal issue is recovery of the variable costs of processing the special order and earning a contribution margin to apply toward covering fixed costs and profits. Thus, given sufficient capacity that would otherwise be idle (opportunity cost is zero), accepting a special order may be indicated as long as the organization recoups its variable costs.

• Question 483:

  The cost described in situation II is a

  A. Prime cost.

  B. Discretionary cost.

  C. Relevant cost.

  D. Imputed cost.

  Correct Answer: B

  A discretionary cost is characterized by uncertainly about the relationship of input (the cost) to output. It also tends to be the subject of a periodic decision regarding the outlay to be made. Research, advertising, and public relations are common examples. Thus, the annual cost of plant service is discretionary because of the difficultly of valuing the output.

• Question 484:

  Total unit costs are

  A. Relevant for cost-volume-profit analysis.

  B. Needed for determining sunk costs.

  C. Irrelevant in marginal analysis.

  D. Independent of the cost system used to generate them.

  Correct Answer: C

  Marginal (incremental or differential) analysis determines the differences in costs among decision choices. Total unit costs are not relevant in marginal analysis because of the inclusion of costs that may not 1[vary among the possible choices considered. In marginal analysis, only the incremental costs are relevant.

• Question 485:

  The term relevant cost applies to all the following decision situations except the

  A. Acceptance of a special order.

  B. Manufacture or purchase of component parts.

  C. Determination of a product price.

  D. Replacement of equipment.

  Correct Answer: C

  Relevant costs are those expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision. Relevant costs are considered in the analysis of decisions to make or buy a product, accept a special order, replace capital equipment, or add or delete a product line. Relevant costing applies to many special decisions but not to determining a product price. This decision involves an evaluation of, among other things, demand, competitors' actions, and total manufacturing and selling costs.

• Question 486:

  The costs described in situations Ill and V are

  A. Prime costs.

  B. Sunk costs.

  C. Discretionary costs.

  D. Imputed costs.

  Correct Answer: B

  A sunk cost is a cost that cannot be avoided because the expenditure has already occurred or an irrevocable decision has been made to incur the cost. Sunk costs are irrelevant to management decision making because they cannot vary with the option selected. Both situations Ill and V represent sunk costs because the costs have already been incurred. 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.

• Question 487:

  The costs described in situations land IV are

  A. Prime costs.

  B. Sunk costs.

  C. Discretionary costs.

  D. Relevant costs.

  Correct Answer: D

  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.

• Question 488:

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

  A. Joint costs.

  B. Incremental costs.

  C. Absorption costs.

  D. Fixed factory overhead.

  Correct Answer: B

  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.

• Question 489:

  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?

  A. Total cost of making X and the revenue from sale of X and Y.

  B. Total cost of making Y and the revenue from sale of Y.

  C. Additional cost of making Y, given the cost of making K and additional revenue from Y.

  D. Additional cost of making K given the cost of making Y, and additional revenue from Y.

  Correct Answer: C

  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.

• Question 490:

  Relevant costs refer to

  A. All fixed costs.

  B. Costs that would be incurred within the relevant range of production.

  C. Past costs that are expected to be different in the future.

  D. Anticipated future costs that will differ among various alternatives.

  Correct Answer: D

  Relevant costs are anticipated costs that will vary among the choices available. In other words1 if two courses of action share some costs, those costs are not relevant because they will be incurred regardless of the decision made.