Chapter 19 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 19 RELEVANT COSTS FOR DECISION MAKING I. Questions 1. Quantitative factors are those which may more easily be reduced in terms of pesos such as projected costs of materials, labor and overhead. Qualitative factors are those whose measurement in pesos is difficult and imprecise; yet a qualitative factor may be easily given more weight than the measurable cost savings. It can be seen that the accountant’s role in making decisions deals with the quantitative factors. 2. Relevant costs are expected future costs that will differ between alternatives. In view of the definition of relevant costs, historical costs are always irrelevant because they are not future costs. They may be helpful in predicting relevant costs but they are always irrelevant costs per se. 3. The differential costs in any given situation is commonly defined as the change in total cost under each alternative. It is not relevant cost, but it is the algebraic difference between the relevant costs for the alternatives under consideration. 4. Analysis: Future costs: Replace Rebuild New Truck P10,200 Less: Proceeds from disposal, net 1,000 P 9,200 P8,500 Advantage of rebuilding P700 The original cost of the old truck is irrelevant but its disposal value is relevant. It is recommended that the truck should be rebuilt because it will involve lesser cash outlay. 5. No. Variable costs are relevant costs only if they differ in total between the alternatives under consideration. 6. Only those costs that would be avoided as a result of dropping the product line are relevant in the decision. Costs that will not differ 19-1
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Chapter 19 Relevant Costs for Decision Making regardless of whether the product line is retained or discontinued are irrelevant. 7. Not necessarily. An apparent loss may be the result of allocated common costs or of sunk costs that cannot be avoided if the product line is dropped. A product line should be discontinued only if the contribution margin that will be lost as a result of dropping the line is less than the fixed costs that would be avoided. Even in that situation the product line may be retained if its presence promotes the sale of other products. 8. Allocations of common fixed costs can make a product line (or other segment) appear to be unprofitable, whereas in fact it may be profitable. 9. In cost-plus pricing, prices are set by applying a markup percentage to a product’s cost. 10. The price elasticity of demand measures the degree to which a change in price affects unit sales. The unit sales of a product with inelastic demand are relatively insensitive to the price charged for the product. In contrast, the unit sales of a product with elastic demand are sensitive to the price charged for the product. 11. The profit-maximizing price should depend only on the variable
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This note was uploaded on 07/18/2011 for the course ECON 102 taught by Professor Sadassad during the Spring '11 term at Abant İzzet Baysal University.

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Chapter 19 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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