ACCA pm Ch 8

Lily is a manager at a manufacturing company and is faced with a decision: should she produce a component in-house or purchase it from an external supplier? What is the primary focus of the decision-making process she should use, as discussed in Chapter 8: "Make or Buy and Other Short-Term Decisions"?

• Long-term investment strategies

• Short-term decision-making techniques using relevant costing

• Marketing and advertising strategies

• Employee performance evaluation

Answer explanation

Chapter 8 focuses on short-term decision-making techniques, particularly using relevant costing to evaluate options like make or buy, which is essential for effective financial management.

Isabelle is reviewing the topics covered in Chapter 8 for her business management course. Which of the following decisions is NOT discussed in Chapter 8?

• Make or buy decisions

• Accepting special orders

• Developing long-term business plans

• Limiting factor analysis

Answer explanation

Chapter 8 focuses on operational decisions like make or buy, accepting special orders, and limiting factor analysis. Developing long-term business plans is a strategic decision and is not covered in this chapter.

Isla is deciding whether to launch a new product line. What are relevant costs and revenues defined as in her decision-making process?

• Past costs that have already been incurred

• Future, incremental cash flows that change depending on the decision taken

• Fixed costs that remain constant regardless of decisions

• Costs that are apportioned across departments

Answer explanation

Relevant costs and revenues are defined as future, incremental cash flows that vary based on the decisions made. This means they are not past costs or fixed costs, but rather the additional costs or revenues that will occur as a result of a decision.

Oscar recently bought a non-refundable concert ticket, but now he is considering whether to attend the concert or not. Which type of cost is considered irrelevant to his decision because it has already been incurred and cannot be changed?

• Future costs

• Incremental costs

• Sunk costs

• Cash flows

Answer explanation

Sunk costs are expenses that have already been incurred and cannot be recovered. Since they cannot be changed or influenced by future decisions, they are considered irrelevant in decision-making.

Jacob is deciding whether to launch a new product line. What type of cost is relevant only if it is caused by the decision being made?

• Committed costs

• Incremental costs

• Apportioned costs

• Sunk costs

Answer explanation

Incremental costs are relevant because they represent additional costs that will occur only if a specific decision is made. In contrast, committed, apportioned, and sunk costs do not change based on the decision at hand.

Ella is evaluating different options for a short-term business decision. Which of the following is NOT considered relevant in her decision-making?

• Future costs

• Cash flows

• Apportioned costs

• Incremental costs

Answer explanation

Apportioned costs are historical and do not change with short-term decisions, making them irrelevant. In contrast, future costs, cash flows, and incremental costs directly impact decision-making.

Emily is deciding between two business projects. What is the key principle for fixed costs in her decision-making?

• Include all costs and revenues regardless of options.

• Include only costs and revenues that differ between options.

• Exclude all costs and revenues.

• Include only fixed costs.

Answer explanation

The key principle in decision-making regarding fixed costs is to include only costs and revenues that differ between options. This approach helps in evaluating the impact of different choices without being misled by irrelevant fixed costs.

James has two job offers. If he chooses the first job, he will not be able to take the second job. What is the definition of opportunity cost in this situation?

• The total cost of producing a product.

• The benefit gained by choosing one option over another.

• The benefit forgone by choosing one option instead of another.

• The cost recorded in accounting books.

Answer explanation

Opportunity cost refers to the benefit forgone by choosing one option instead of another. It highlights the value of the next best alternative that is not chosen, making the correct answer the benefit forgone.

Grace is the manager of a small manufacturing company. She is considering whether to produce a component in-house or purchase it from an external supplier. Which of the following is NOT a step Grace should take in making her 'Make or Buy' decision?

• Identify relevant costs of making the product.

• Identify buying price and additional costs.

• Include sunk and apportioned costs.

• Compare total relevant costs.

Answer explanation

Including sunk and apportioned costs is not relevant for a 'Make or Buy' decision, as these costs do not affect future cash flows. The focus should be on relevant costs that impact the decision.

Daniel runs a bakery and receives a special order for 500 cupcakes from a local business. Which of the following is NOT a step Daniel should consider when deciding whether to accept or reject the special order?

• Identify incremental revenues and incremental costs.

• Ensure spare capacity exists.

• Include sunk costs in the decision-making process.

• Accept if incremental revenue is greater than incremental cost.

Answer explanation

Including sunk costs is incorrect because they are past expenses and should not influence the decision on special orders. The focus should be on incremental revenues and costs.