ACCA F5: Ch 5 - Make Or Buy And Other Short-term Decisions

23 Questions | Total Attempts: 125

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ACCA Quizzes & Trivia

When it comes to production some of the input used can either be too expensive or affordable to make therefore leading to the decision of whether to buy or make. How good are you at analyzing the costs of these two and choosing the right move? Take up the quiz to find out.


Questions and Answers
  • 1. 
    _________ costs are future cash flows arising as a direct consequence of the decision under consideration
  • 2. 
    The three elements of relevant costs:
    • A. 

      Cash flows

    • B. 

      Future costs and revenues

    • C. 

      Differential costs and revenues

    • D. 

      Depreciation costs

    • E. 

      Past costs and revenues

  • 3. 
    Cash flows:  To evaluate a decision ______ cash flows should be considered. Non-cash items such as depreciation and interdivisional charges should be ignored.
  • 4. 
    Future costs and revenues. This means that past costs and revenues are only useful insofar as they provide a guide to the future. Costs already spent, known as ____ costs, are irrelevant for decision making.
  • 5. 
    _________ costs and revenues. Only those costs and revenues that alter as a result of a decision are relevant. Where factors are common to all the alternatives being considered they can be ignoredÍž only the differences are relevant.
  • 6. 
    In many shortrun situations the fixed costs remain constant for each of the alternatives being considered and thus the marginal costing approach showing sales, marginal cost and contribution is particularly appropriate.
    • A. 

      True

    • B. 

      False

  • 7. 
    In the long run (and sometimes in the short run) fixed costs remain constant for each of the alternatives being considered and thus the marginal costing approach showing sales, marginal cost and contribution is particularly appropriate.
    • A. 

      True

    • B. 

      False

  • 8. 
    _________ cost is an important concept for decision-making purposes. It is the value of the best alternative that is foregone when a particular course of action is undertaken. It emphasises that decisions are concerned with choices and that by choosing one plan there may well be sacrifices elsewhere in the business.
  • 9. 
    Any historic cost given for materials is always a ____ cost and never relevant unless it happens to be the same as the current purchase price.
  • 10. 
    The relevant cost of materials: In stock - In regular use and will be replaced - Relevant cost =
    • A. 

      Current purchase price

    • B. 

      Opportunity cost (eg lost scrap value or lost contribution)

    • C. 

      Historic cost

  • 11. 
    The relevant cost of materials: In stock - Will not be replaced - Relevant cost =
    • A. 

      Current purchase price

    • B. 

      Opportunity cost (eg lost scrap value or lost contribution)

    • C. 

      Historic cost

  • 12. 
    The relevant cost of materials: Out of stock - Relevant cost =
    • A. 

      Current purchase price

    • B. 

      Opportunity cost (eg lost scrap value or lost contribution)

    • C. 

      Historic cost

  • 13. 
    The relevant cost of labour: Spare capacity - Relevant cost =
    • A. 

      Nil

    • B. 

      Extra cost of labour

    • C. 

      Opportunity cost of diverting labour

  • 14. 
    The relevant cost of labour: Full capacity - Can hire more labour - Relevant cost =
    • A. 

      Nil

    • B. 

      Extra cost of labour

    • C. 

      Opportunity cost of diverting labour

  • 15. 
    The relevant cost of labour: Full capacity - Can't hire more labour - Relevant cost =
    • A. 

      Nil

    • B. 

      Extra cost of labour

    • C. 

      Opportunity cost of diverting labour

  • 16. 
    A product should be made in-house if the relevant cost of making the product in-house is more than the cost of buying the product externally.
    • A. 

      True

    • B. 

      False

  • 17. 
    If spare capacity exists: The relevant cost of making the product in-house =
    • A. 

      The variable cost of internal manufacture plus any fixed costs directly related to that product.

    • B. 

      The variable cost of internal manufacture plus any fixed costs directly related to that product plus the opportunity cost of internal manufacture (e.g. lost contribution from another product).

  • 18. 
    If no spare capacity exists: The relevant cost of making the product in-house =
    • A. 

      The variable cost of internal manufacture plus any fixed costs directly related to that product.

    • B. 

      The variable cost of internal manufacture plus any fixed costs directly related to that product plus the opportunity cost of internal manufacture (e.g. lost contribution from another product).

  • 19. 
    In addition to the relative cost of buying externally compared to making in-house, management must consider a number of other issues before a final decision is made.
    • A. 

      Reliability of external supplier

    • B. 

      Specialist skills

    • C. 

      Alternative use of resource

    • D. 

      Social

    • E. 

      Legal

    • F. 

      Confidentiality

    • G. 

      Customer reaction

    • H. 

      Unskilled skills

    • I. 

      Administrative

  • 20. 
    The quantifiable cost or benefit of closure
    • A. 

      The lost contribution from the area that is being closed

    • B. 

      Savings in specific fixed costs from closure

    • C. 

      Known penalties and other costs resulting from the closure

    • D. 

      Any known reorganisation costs

    • E. 

      Any known additional contribution from the alternative use for resources released

    • F. 

      Penalties and other costs resulting from the closure may not be known with certainty

    • G. 

      Reorganisation costs may not be known with certainty

    • H. 

      Additional contribution from the alternative use for resources released may not be known with certainty

    • I. 

      Knock-on impact of the shut-down decision

  • 21. 
    The non-quantifiable cost or benefit of closure
    • A. 

      The lost contribution from the area that is being closed

    • B. 

      Savings in specific fixed costs from closure

    • C. 

      Known penalties and other costs resulting from the closure

    • D. 

      Any known reorganisation costs

    • E. 

      Any known additional contribution from the alternative use for resources released

    • F. 

      Penalties and other costs resulting from the closure may not be known with certainty

    • G. 

      Reorganisation costs may not be known with certainty

    • H. 

      Additional contribution from the alternative use for resources released may not be known with certainty

    • I. 

      Knock-on impact of the shut-down decision

  • 22. 
    For a one-off contract, 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 accepted.
    • A. 

      True

    • B. 

      False

  • 23. 
    When deciding whether to process a product further or to sell after split-off only future incremental cash flows should be considered:
    • A. 

      Any difference in revenue and any extra costs

    • B. 

      Joint costs are sunk at this stage and thus not relevant to the decision

    • C. 

      Joint costs before the split-off