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How would the above decision change if Pawns, Rooks and Bishops were manufactured in different departments, variable costs could be split down into the costs of direct materials, labour and overheads, and fixed costs could be analysed into the costs of administrative staff and equipment and premises costs? 

Choose the correct word(s) from those highlighted. 

In a situation where a company must subcontract work to make up a shortfall in its own in-house capabilities, its total cost will be minimised if those units bought out from a subcontractor/made in-house have the lowest/highest extra variable/fixed cost of buying out/making in-house per unit of scarce resource/material. 

Fill in the blanks. 

Most of the decisions considered in this chapter involve calculating …………………….. obtained from various options after identifying ……………………….. . They always involve ………………………….  issues, which depend on the precise situation described. 

A company uses its direct labour workforce to make a product for which the sales price and unit cost are as follows.  

                                                                                             $ 

Selling price                                                                     80 

Direct materials                                                              10 

Direct labour (2 hours)                                                  20 

Variable overheads (2 hours)                                        4 

Fixed overheads (2 hours)                                           30 

The workforce is operating at full capacity and it is not possible to obtain any additional labour hours in the near future. A customer has asked the company to perform a special job that would require 20 hours of direct labour time. 

What would be the relevant cost of diverting labour from its existing work to perform the special job for the customer? 

 This objective test question contains a question type which will only appear in a computer-based exam, but this question provides valuable practice for all students whichever version of the exam they are taking. 

Appler is considering the relevant cash flows involved in a short-term decision. An important client has asked for the minimum price for the processing of a compound.  The compound involves the following: 

Material A: Appler needs 500 kg of material for the compound but has 200 kg in stock present. The stock items were bought 3 months ago for $5/kg but have suffered 10% shrinkage since that date.  Material A is not regularly used in the business and would have to be disposed of at a cost to Appler of $400 in total. The current purchase price of material A is $6.25/kg. 

Material B: Appler needs 800 kg of material B and has this in stock as it is regularly needed.  The stock was bought 2 months ago for $4/kg although it can be bought now at $3.75/kg due to its seasonal nature. 

Processing energy costs would be $200 and the supervisor says he would allocate $150 of his weekly salary to the job in the company’s job costing system. 

Based upon the scenario information, what is the total cost of material A and B to be built in to the minimum price calculation? 

 X plc intends to use relevant costs as the basis of the selling price for a special order: the printing of a brochure. The brochure requires a particular type of paper that is not regularly used by X plc although a limited amount is in X plc’s inventory which was left over from a previous job. The cost when X plc bought this paper last year was $15 per ream and there are 100 reams in inventory. The brochure requires 250 reams. The current market price of the paper is $26 per ream, and the resale value of the paper in inventory is $10 per ream. 

What is the relevant cost of the paper to be used in printing the brochure? 

A

 $2,500 

B

 $4,900 

C

 $5,400 

D

 $6,500 

 Jorioz Co makes joint products X and Y. $120,000 joint processing costs are incurred. 

At the split-off point, 10,000 units of X and 9,000 units of Y are produced, with selling prices of $1.20 for X and $1.50 for Y. 

The units of X could be processed further to make 8,000 units of product Z. The extra costs incurred in this process would be fixed costs of $1,600 and variable costs of $0.50 per unit of input. 

The selling price of Z would be $2.25. 

What would be the outcome if product X is further processed? 

A

 $600 loss 

B

 $400 gain 

C

 $3,900 gain 

D

 $1,600 loss 

In a decision about whether or not to sell a joint product at the split-off point or after further processing, joint costs are relevant. 

A

True

B

False

 What are the relevant costs in a make or buy decision? 

A

 The sum of the relevant costs of the two options 

B

The opportunity costs associated with the decision 

C

 The differential costs between the two options 

D

 The incremental costs of the two options 

A company wants to decide whether to make its materials in-house or whether to sub-contract production to an external supplier. In the past it has made four materials in-house, but demand in the next year will exceed in-house production capacity of 8,000 units. All four materials are made on the same machines and require the same machine time per unit: machine time is the limiting production factor. The following information is available. 



If a decision is made solely on the basis of short-term cost considerations, what materials should the company purchase externally? 

A

 4,000 units of W and 1,000 units of Z 

B

 4,000 units of W and 4,000 units of Z 

C

 3,000 units of Y and 2,000 units of Z 

D

1,000 units of Y and 4,000 units of Z