Chapter 9 Short-term non-routine decisions
MULTIPLE CHOICE
Basic concepts
1. The term relevant cost applies to all of the following decision situations except the
A. Acceptance of special product order.
B. Determination of product price.
C. Manufacture of purchase of a component part.
D. Replacement of equipment. (rpcpa)
1. B
? When is the term relevant cost not applicable.
The term “relevant cost” refers to those costs and expenses that are used in
making a decision. A cost which is not considered in making a decision is an
irrelevant cost. A cost may be relevant in one decision but may be irrelevant in
another. There are relevant costs used in deciding on whether to accept or reject a
special order, determining a product price, manufacturing or buying a component
part, and replacing or retaining old equipment. There are relevant costs in every
decision made.
The best answer among the choices given is letter ”b”, although there are still
relevant costs in deciding on what is the best selling price for the business.
2. The relevance of a particular cost to a decision is determined by the
A. Size of the cost.
B. Riskiness of the decision.
C. Potential effect(s) on the decision.
D. Accuracy and verifiability of the cost. (cma)
2 C
? The attribute that makes a cost relevant in a decision.
A cost is relevant when used in making a decision. And a cost is used in decision-
making when it differs from one option to another, and when it deals with the future.
Therefore, the relevance of cost is determined by its potential effect(s) on the
decision. A cost may be relevant in one decision but is irrelevant in another.
Choice-letter “a” is incorrect because the size or amount of a cost does not
measure relevance in decision making but the effects of such cost regardless of
size is relevant. Choice-letter “b” is also incorrect because cost does not reflect the
risk associated with a decision but is more determined by the circumstances
besetting the environment of a certain decision made. Choice-letter “d” is incorrect
because even if such cost is accurate and verifiable but is not used in decision-
making, the same shall be irrelevant and not used in the decision.
3. Relevant or differential cost analysis
A. Takes all variable and fixed cost into account to analyze decision alternatives.
B. Considers only variable cost as they change with each decision alternative.
C. Considers the change in reported net income for each alternative to arrive at
the optimum decision for the company.
D. Considers all variable and fixed cost as they change with each decision
alternative (cma)