BUS-091 Managerial Accounting Module 4
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Questions and Answers

What is the definition of opportunity cost in the context of using a machine for production?

  • The sum of fixed and variable costs for equipment used.
  • The benefit of making another type of product that is lost. (correct)
  • The total production cost incurred when making a different product.
  • The market price difference between two products.

    • Which of the following is a qualitative factor that can impact managerial decisions?

  • Return on investment for new machinery.
  • Projected sales revenue from a new product.
  • Employee morale affected by layoffs. (correct)
  • Cost savings from outsourcing production.

    • What approach is used to focus only on relevant costs and benefits in decision-making?

  • Historical cost approach.
  • Incremental analysis approach. (correct)
  • Comprehensive analysis approach.
  • Market-based analysis approach.

    • Why should fixed and variable costs be analyzed separately?

    <p>Their behavior affects decisions differently.</p> Signup and view all the answers

    What is a potential consequence of discounting prices for select customers?

    <p>Upset feelings among regular customers.</p> Signup and view all the answers

    Which type of decisions are considered short-term managerial decisions?

    <p>Accepting a special order at a reduced price.</p> Signup and view all the answers

    In decision-making, what must relevant costs do?

    <p>Differ between alternatives and occur in the future.</p> Signup and view all the answers

    Which factor can cloud decision-making by creating information overload?

    <p>Irrelevant information.</p> Signup and view all the answers

    What is a possible outcome of ignoring qualitative factors in management decisions?

    <p>Serious mistakes in decision-making.</p> Signup and view all the answers

    What role do relevant non-financial information play in managerial decision-making?

    <p>They provide insights that differ across alternatives.</p> Signup and view all the answers

    What are relevant costs primarily concerned with?

    <p>Future costs that differ between alternatives</p> Signup and view all the answers

    Which of the following represents an irrelevant cost?

    <p>A salary paid to a CEO for store closure decision</p> Signup and view all the answers

    Opportunity cost is defined as:

    <p>The benefit lost when one alternative is chosen over another</p> Signup and view all the answers

    When making a decision between two cars, which costs would be considered relevant?

    <p>Sales tax and insurance premium differences</p> Signup and view all the answers

    Which of the following statements is true regarding sunk costs?

    <p>They represent costs that have already been incurred</p> Signup and view all the answers

    In the context of outsourcing, which type of cost is considered when deciding whether to continue in-house operations?

    <p>Relevant costs</p> Signup and view all the answers

    Which of the following examples best illustrates an opportunity cost?

    <p>The lost income from not taking a new job offer</p> Signup and view all the answers

    Which type of costs should managers ignore when making short-term business decisions?

    <p>Costs that have been incurred in the past</p> Signup and view all the answers

    What aspect distinguishes relevant costs from irrelevant costs?

    <p>Relevant costs affect future cash flows</p> Signup and view all the answers

    When a company evaluates whether to keep or sell an asset, which type of costs would be most critical to consider?

    <p>Future costs related to maintenance</p> Signup and view all the answers

    Relevant costs are costs that have already been incurred and cannot be changed.

    <p>False</p> Signup and view all the answers

    Sunk costs are considered relevant when making future business decisions.

    <p>False</p> Signup and view all the answers

    Opportunity cost represents the benefit forgone from the next best alternative when a choice is made.

    <p>True</p> Signup and view all the answers

    The amount paid to a company's CEO is considered a relevant cost when deciding to close one of the stores.

    <p>False</p> Signup and view all the answers

    Irrelevant costs are those that do not vary between different alternatives and do not affect decision-making.

    <p>True</p> Signup and view all the answers

    What differentiates relevant costs from irrelevant costs in decision-making?

    <p>Relevant costs differ between alternatives and will be incurred in the future, while irrelevant costs do not change regardless of the decision made.</p> Signup and view all the answers

    How does opportunity cost manifest in managerial decision-making?

    <p>Opportunity cost reflects the benefits that are sacrificed when one alternative is chosen over another.</p> Signup and view all the answers

    Why is a sunk cost considered irrelevant when making a future business decision?

    <p>A sunk cost is an expense that has already been incurred and cannot be recovered, thus it should not influence future decisions.</p> Signup and view all the answers

    In the context of buying a new car, what factors would be classified as relevant costs?

    <p>Relevant costs would include the different invoice price, sales tax, and insurance premium associated with each car option.</p> Signup and view all the answers

    How should managers approach the analysis of fixed and variable costs in short-term decisions?

    <p>Managers should analyze fixed and variable costs separately to accurately assess how they impact relevant costs and decision outcomes.</p> Signup and view all the answers

    Study Notes

    Relevant and Irrelevant Costs

    • Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
    • Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
    • Irrelevant costs do not influence decisions; they remain the same across alternatives.
    • Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.

    Opportunity Cost

    • Opportunity cost is the potential benefit lost when choosing one option over another.
    • Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.

    Non-Financial Considerations

    • Non-financial factors also influence managerial decisions, such as community impact or employee morale.
    • Qualitative characteristics must also differ between alternatives and occur in the future.

    Short-Term Business Decisions

    • Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
    • Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.

    Incremental Analysis Approach

    • Focuses on the change in operating income for each decision alternative.
    • Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.

    Cost Behavior

    • Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.

    Relevant and Irrelevant Costs

    • Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
    • Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
    • Irrelevant costs do not influence decisions; they remain the same across alternatives.
    • Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.

    Opportunity Cost

    • Opportunity cost is the potential benefit lost when choosing one option over another.
    • Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.

    Non-Financial Considerations

    • Non-financial factors also influence managerial decisions, such as community impact or employee morale.
    • Qualitative characteristics must also differ between alternatives and occur in the future.

    Short-Term Business Decisions

    • Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
    • Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.

    Incremental Analysis Approach

    • Focuses on the change in operating income for each decision alternative.
    • Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.

    Cost Behavior

    • Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.

    Relevant and Irrelevant Costs

    • Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
    • Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
    • Irrelevant costs do not influence decisions; they remain the same across alternatives.
    • Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.

    Opportunity Cost

    • Opportunity cost is the potential benefit lost when choosing one option over another.
    • Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.

    Non-Financial Considerations

    • Non-financial factors also influence managerial decisions, such as community impact or employee morale.
    • Qualitative characteristics must also differ between alternatives and occur in the future.

    Short-Term Business Decisions

    • Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
    • Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.

    Incremental Analysis Approach

    • Focuses on the change in operating income for each decision alternative.
    • Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.

    Cost Behavior

    • Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.

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    Description

    This quiz covers the essential concepts of relevant costs in Managerial Accounting as discussed in Module 4. You will explore how managers utilize knowledge of cost behavior to make short-term business decisions, including outsourcing. Test your understanding of these important principles today!

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