Acca F5 Make Or Buy And Other Short-term Decisions Quiz

1. What are relevant costs?

Relevant costs include all costs incurred by the company in the past.

Relevant costs are historical expenditures related to the decision under consideration.

Relevant costs are fixed costs that do not change regardless of the decision made.

2 Relevant costs and revenues Relevant costs are future cash flows arising as a direct consequence of the decision under consideration

2. What are the three elements to relevant costs and revenues?

1) Historical costs and revenues. Past financial data is the most important factor in making decisions.

2) Fixed costs and revenues. Fixed costs are always relevant, and changes in fixed costs should be considered for decision making.

2 Relevant costs and revenues 1) Cash flows. Actual cash flows should be considered. Noncash items such as depreciation and interdivisional charges should be ignored. 2) Future costs and revenues. Past costs and revenues are only useful as a guide to the future. Costs already spent - sunk costs- are irrelevant for decision making. 3) Differential costs and revenues. Only the costs and revenues that alter as a result of a decision are relevant. Factors common to all alternatives being considered can be ignored? only the differences are relevant.

3) External costs and revenues. Only costs and revenues that are generated internally within a company are relevant.

The three elements to relevant costs and revenues are cash flows, future costs and revenues, and differential costs and revenues. Historical costs, fixed costs, and external costs are not the primary factors for consideration in decision-making.

Explanation

The three elements to relevant costs and revenues are cash flows, future costs and revenues, and differential costs and revenues. Historical costs, fixed costs, and external costs are not the primary factors for consideration in decision-making.

3. What are the considerations for relevant costs and revenues in short-run and long-run situations?

1) Short-run situations do not require consideration of fixed costs. 2) Long-run situations do not involve any changes in fixed costs.

1) Marginal costing does not show sales, marginal cost, and contribution in the short-run. 2) Fixed costs do not change in the long-run.

2 Relevant costs and revenues 1) In many shortrun situations fixed costs remain constant for each alternatives being considered therefore marginal costing showing sales, marginal cost and contribution is particularly appropriate 2) Fixed costs do change and the differential costs must include any changes in the amount of fixed costs.

1) Fixed costs remain constant for each alternative being considered. 2) Differential costs remain the same in short-run and long-run situations.

4. What is opportunity cost?

- Value of the best alternative that is foregone when a particular course of action is undertaken. - by choosing one plan there may well be sacrifices elsewhere in the business.

The payment made to get an opportunity to make a decision.

An outdated economic concept no longer relevant in modern business.

The profit gained from choosing a particular course of action.

Opportunity cost refers to the value of the next best alternative foregone when a decision is made. It is a crucial concept in economics and business decision-making.

Explanation

Opportunity cost refers to the value of the next best alternative foregone when a decision is made. It is a crucial concept in economics and business decision-making.

5. Are historic materials cost relevant?

4 The relevant cost of materials - always a sunk cost and never relevant unless it happens to be the same as the current purchase price.

Yes, historic materials cost is relevant regardless of the current purchase price.

No, historic materials cost is always relevant for decision-making purposes.

Only if the historic materials cost is lower than the current purchase price, it is considered relevant.

The relevant cost of materials is typically a sunk cost and is not considered in decision-making unless it coincidentally matches the current purchase price.

Explanation

The relevant cost of materials is typically a sunk cost and is not considered in decision-making unless it coincidentally matches the current purchase price.

6. What is the relevant cost of labor?

The fixed cost of labor.

5 The relevant cost of labour

The indirect cost of labor.

The historical cost of labor.

The relevant cost of labor refers to the cost that is directly attributable to a specific decision or project. It includes the variable cost of labor that varies with the level of production or activity.

Explanation

The relevant cost of labor refers to the cost that is directly attributable to a specific decision or project. It includes the variable cost of labor that varies with the level of production or activity.

7. When should a product be made in-house?

6 Make versus buy - if relevant cost of making the product in-house is less than the cost of buying the product externally.

If making the product in-house is time-consuming.

If buying the product externally is cheaper regardless of quality.

If the company lacks the necessary expertise to make the product.

The decision of making a product in-house should be based on the relevant cost comparison between in-house production and external purchase to ensure cost-effectiveness.

Explanation

The decision of making a product in-house should be based on the relevant cost comparison between in-house production and external purchase to ensure cost-effectiveness.

8. If spare capacity exists, what is the relevant cost of making the product in-house?

Market price of the product

6 Make versus buy relevant cost = variable cost of internal manufacture + fixed costs directly related to that product

Fixed costs directly related to that product

Total cost of internal manufacture

The relevant cost of making the product in-house includes the variable cost of internal manufacture plus the fixed costs directly related to that product. This takes into account both the variable costs that vary with production level and the fixed costs that are incurred regardless of the level of production.

Explanation

The relevant cost of making the product in-house includes the variable cost of internal manufacture plus the fixed costs directly related to that product. This takes into account both the variable costs that vary with production level and the fixed costs that are incurred regardless of the level of production.

9. What is the relevant cost of making the product in-house when no spare capacity exists?

6 Make versus buy relevant cost = variable cost of internal manufacture + fixed costs directly related to that product + opportunity cost of internal manufacture (e.g. lost contribution from another product).

Opportunity cost of outsourcing the product + fixed costs directly related to that product

Sunk costs associated with the product + variable cost of internal manufacture

Fixed costs unrelated to the product + variable cost of internal manufacture

The relevant cost of making a product in-house involves considering the variable costs, fixed costs directly related to the product, and the opportunity cost of internal manufacture. The incorrect answers provided either include irrelevant costs or do not capture the full picture of relevant costs when making this strategic decision.

Explanation

The relevant cost of making a product in-house involves considering the variable costs, fixed costs directly related to the product, and the opportunity cost of internal manufacture. The incorrect answers provided either include irrelevant costs or do not capture the full picture of relevant costs when making this strategic decision.

10. When considering the make versus buy decision, what factors must also be taken into account beyond the cost comparison of purchasing externally versus making in-house?

Company history, employee training, advertising budget, and customer preferences.

Quantity of materials needed, available workspace, employee satisfaction, and marketing strategies.

Location of the supplier, employee wages, raw material availability, and technology advancements.

Reliability of external supplier- quantity required- quality required- delivering on time- price stability Specialist skills: the external supplier may possess some specialist skills that are not available in-house Alternative use of resource: outsourcing will free up resources which may be used in another part of the business. Social: will outsourcing result in a reduction of the workforce? Redundancy costs should be considered. Legal: will outsourcing affect contractual obligations with suppliers or employees? Confidentiality: is there a risk of loss of confidentiality, especially if the external supplier performs similar work for rival companies Customer reaction: Do customers attach importance to the products being made in-house?

The correct answer provides a comprehensive list of factors that must be considered in the make versus buy decision, covering aspects such as supplier reliability, quality and quantity requirements, legal implications, and customer reactions.

Explanation

The correct answer provides a comprehensive list of factors that must be considered in the make versus buy decision, covering aspects such as supplier reliability, quality and quantity requirements, legal implications, and customer reactions.

11. When considering the quantifiable cost or benefit of closure, what relevant cash flows associated with closure should be considered?

Only the cost of reorganisation for closure

The personal feelings of employees affected by the closure

The revenue generated from the area being closed

7 Shut-down decisions - the lost contribution from the area that is being closed (= relevant cost of closure) - savings in specific fixed costs from closure (=relevant benefit of closure) - known penalties and other costs resulting from the closure, e.g. redundancy, compensation to customers (=relevant cost of closure) - any known reorganisation costs (= relevant cost of closure) - any known additional contribution from the alternative use for resources released (= relevant benefit of closure)

The correct answer includes various relevant cash flows that should be considered when evaluating the cost or benefit of closure. These include lost contribution, savings in fixed costs, penalties and other costs, reorganisation costs, and additional contributions from alternative resource uses. The incorrect answers do not capture the comprehensive range of factors that impact the financial aspects of closure decisions.

Explanation

The correct answer includes various relevant cash flows that should be considered when evaluating the cost or benefit of closure. These include lost contribution, savings in fixed costs, penalties and other costs, reorganisation costs, and additional contributions from alternative resource uses. The incorrect answers do not capture the comprehensive range of factors that impact the financial aspects of closure decisions.

12. What are the non-quantifiable costs and benefits of closure in shut-down decisions?

Shut-down decisions have no impact on reorganization costs.

The alternative use for resources post closure always yields higher profits.

7 Shut-down decisions - penalties and other costs resulting from the closure (e.g. redundancy, compensation to customers) may not be known with certainty. - reorganisation costs may not be known with certainty - additional contribution from the alternative use for resources released may not be known with certainty - Knock-on impact of the shut-down decision. For example, supermarkets often stock some goods which they sell at a loss. This is to get customers through the door, who they then hope will purchase other products which have higher profit margins for them. If the decision is taken to stop selling these products then the customers may no longer come to the store

The knock-on impact of shut-down decisions is always positive.

The non-quantifiable costs of closure are always accurately predictable.

13. When a business is presented with a one-off contract, how should it calculate the minimum contract price and when should the contract be rejected?

8 One-off contracts The minimum contract price = the total of the relevant cash flows associated with the contract. If the contract price does not cover these cash flows then it should be rejected

The minimum contract price should be equal to the business's fixed costs, regardless of the contract's cash flows.

The minimum contract price should be set based on competitors' pricing strategies.

The contract should be accepted regardless of whether it covers the cash flows or not.

The correct way to calculate the minimum contract price is by considering the total cash flows associated with the contract. This ensures that the business covers all relevant costs and makes a profit. Accepting a contract below the cash flows would result in a loss. Setting the price based on competitors or fixed costs may not accurately reflect the true value of the contract.

Explanation

The correct way to calculate the minimum contract price is by considering the total cash flows associated with the contract. This ensures that the business covers all relevant costs and makes a profit. Accepting a contract below the cash flows would result in a loss. Setting the price based on competitors or fixed costs may not accurately reflect the true value of the contract.

14. When deciding whether to process a product further or to sell after split-off, which future incremental cash flows should be considered?

Historical costs should be considered

Only future variable costs should be considered

Only joint costs should be considered

9 Further processing decisions - Any difference in revenue and any extra costs - Joint costs are sunk at this stage and thus not relevant to the decision

When making further processing decisions, it is important to consider the difference in revenue and any extra costs as future incremental cash flows. Joint costs are sunk costs and should not be factored into the decision-making process.

Explanation

When making further processing decisions, it is important to consider the difference in revenue and any extra costs as future incremental cash flows. Joint costs are sunk costs and should not be factored into the decision-making process.