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Unformatted text preview: Chapter 5 Management Accounting Information for Activity and Process Decisions QUESTIONS 5-1 In evaluating the different alternatives from which managers can choose, it is better to focus only on the relevant costs that differ across different alternatives because it does not divert the manager’s attention with irrelevant facts. If some costs remain the same regardless of what alternative is chosen, then those costs are not useful for the manager’s decisions, as they are not affected by the decision. Therefore, it is better to omit them from the cost analysis used to support the decision. 5-2 No, sunk costs are not relevant costs. Sunk costs are the costs of resources that have already been committed and, regardless of what decision is made by the managers, these costs cannot be avoided. Therefore, they are irrelevant for the decision. 5-3 The general principal is that sunk costs are not relevant costs. But, some managers may consider sunk costs to be relevant because they may be concerned about how others will perceive their original decision to incur these costs, and may want to cover up their initial poor judgment. 5.4 Both direct labor (DL) and material (DM) costs can be either relevant or irrelevant depending on the decision context and the alternatives that are available to the managers. When considering the purchase of automated equipment that will decrease the defect rate, both DL and DM are, in general, relevant costs because these costs are likely to decrease if the new machine is purchased. However, DM can be a sunk cost in the short- run if the materials usable only with the old machine have been already purchased or purchase commitments have been made. Similarly, if labor has been contracted for a specified period and the company cannot eliminate the extra labor when the automated equipment is purchased, then the DL cost also will be irrelevant in the short-run. – 207 – Atkinson, Solutions Manual t/a Management Accounting, 5E 5.5 No, fixed cost are not always irrelevant. For example, in comparing the status quo and a proposal to substantially increase the quantity of goods or services provided, additional fixed costs (that is, costs not proportional to volume) may be incurred to provide the increased quantity. 5-6 In the context of a make or buy decision, product sustaining costs such as production engineering staff salaries are relevant if these costs can be eliminated by assigning the staff to other tasks, or by laying off the engineers not required when a part is outsourced. If it is possible to find an alternative use for the facilities made available because of the elimination of a product or a component, the facility- sustaining (business-sustaining) costs also are relevant....
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