IMANET IMANET Certifications CMA Questions & Answers

• Question 491:

  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?

  A. The book value of the old printing press.

  B. The trade-in value of the old printing press.

  C. The estimated reduction in operating costs.

  D. The interest on the existing debt.

  Correct Answer: A

  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.

• Question 492:

  The opportunity cost of making a component part in a factory with no excess capacity is the

  A. Variable manufacturing cost of the component.

  B. Total manufacturing cost of the component.

  C. Cost of the production given up in order to manufacture the component.

  D. Net benefit forgone from the best alternative use of the capacity required.

  Correct Answer: D

  An opportunity cost is the return from the next best opportunity that could have been selected for the use of scarce resources. It does not represent an actual receipt or disbursement of resources and is not recorded in the accounting records. If the part could be made using otherwise idle capacity, there would be no opportunity cost.

• Question 493:

  Opportunity costs are

  A. Not used for decision making.

  B. The same as variable costs.

  C. Equal to historical costs.

  D. Relevant to decision making.

  Correct Answer: D

  Opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource. An opportunity cost is therefore relevant to the decision process.

• Question 494:

  Relevant or differential cost analysis

  A. Takes all variable and fixed costs into account to analyze decision alternatives.

  B. Considers only variable costs as they change with each decision alternative.

  C. Considers all variable and fixed costs as they change with each decision alternative.

  D. Allows the decision maker to group all types of costs together to facilitate decision making.

  Correct Answer: C

  Relevant cost analysis considers only those costs that differ among decision options. Both fixed and variable costs are considered if they vary with the option selected.

• Question 495:

  The costs described in situations 2, 3, and 5 are

  A. Sunk costs.

  B. Discretionary costs.

  C. Relevant costs.

  D. Differential costs.

  Correct Answer: A

  Joint production costs are irrelevant to deciding whether to sell at split-off or to process further. Similarly, already incurred RandD costs and the costs of obsolete inventory are irrelevant to future decisions. Thus, these are examples of sunk costs. Sunk costs are unavoidable. They are the result of a past irrevocable decision and thus have no relevance to future decisions.

• Question 496:

  The costs described in situations 1 and 4 are

  A. Prime costs.

  B. Sunk costs.

  C. Discretionary costs.

  D. Relevant costs.

  Correct Answer: D

  Alternative uses of plant space to be considered in a make/buy decision and the cost of a special device necessary for acceptance of a special order are examples of relevant costs. Relevant costs are future costs that are expected to vary with the action taken. Other costs thus have no effect on the decision. Management accountants are frequently asked to analyze various decision situations, including the following.

  1.

  Alternative uses of plant space, to be considered in a make/buy decision.

  2.

  Joint production costs incurred1 to be considered in a sell-at-split versus a process- further decision.

  3.

  Research and development costs incurred in prior months, to be considered in a product-introduction decision.

  4.

  The cost of a special device that is necessary if a special order is accepted.

  5.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

• Question 497:

  BCD Corp. outsourced an order for shovel handles to RST Corp. because BCD could not fill the order. By having RST produce the order, BCD was able to realize $10000 in sales profits that otherwise would have been lost. The outsourcing cost added a cost of $1 .000, but BCD was ahead by $9000 when the order was completed. Which of the following statements is correct regarding BCD's action?

  A. The use of resource markets outside of BCD involves opportunity cost.

  B. Accounting profit is total revenue minus explicit costs and implicit costs.

  C. Implicit costs are not opportunity costs because they are internal costs.

  D. Explicit costs are opportunity costs from purchasing shovel handles from a resource market.

  Correct Answer: A

  Opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. It is the

  benefit, for example, the contribution to income, provided by the best alternative use of that resource.

  Thus, outsourcing involves opportunity cost. The outsourcer uses resources for purposes other than filling

  the order and therefore forgoes the benefits it would have received.

  Management accountants are frequently asked to analyze various decision situations, including the

  following.

  1.

  Alternative uses of plant space, to be considered in a make/buy decision.

  2.

  Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.

  3.

  Research and development costs incurred in prior months, to be considered in a product-introduction decision.

  4.

  The cost of a special device that is necessary if a special order is accepted.

  5.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

• Question 498:

  Which concept of costs includes only explicit costs?

  A. Economic.

  B. Opportunity

  C. Accounting.

  D. Sunk.

  Correct Answer: C

  The accounting concept of costs includes only explicit costs, i.e., those that represent actual outlays of cash, the allocation of outlays of cash, or commitments to pay cash. Examples include the incurrence of payables and the satisfaction of payables.

• Question 499:

  The relevance of a particular revenue to a decision is determined by

  A. Riskiness of the decision.

  B. Number of decision variables.

  C. Amount of the revenue.

  D. Potential effect of the decision.

  Correct Answer: D

  Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant revenues are those expected future revenues that vary with the action taken.

• Question 500:

  A manufacturing firm planned to manufacture and sell 100,000 units of product during the year at a variable cost per unit of $4.00 and a fixed cost per unit of $2.00. The firm fell short of its goal and only manufactured 80,000 units at a total incurred cost of $515,000. The firm's manufacturing cost variance was

  A. $85,000 favorable.

  B. $35,000 unfavorable.

  C. $5,000 favorable.

  D. $5,000 unfavorable.

  Correct Answer: C

  The company planned to produce 100,000 units at $6 each ($4 variable + $2 fixed cost), or a total of $600,000, consisting of $400000 of variable costs and $200,000 of fixed costs. Total production was only 80,000 units at a total cost of $515,000. The flexible budget for a production level of 80,000 units includes variable costs of $320,000 ($4 x 80,000 units). Fixed costs would remain at $200,000. Thus, the total flexible budget costs are $520,000. Given that actual costs were only $515,000, the variance is $5,000 favorable.