Chapter 19 Answer
MANAGEMENT ACCOUNTING (VOLUME II) - 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:
New Truck
Less: Proceeds from disposal, net
Replace
P10,200
Rebuild
1,000
P 9,200
Advantage of rebuilding
P8,500
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.
19-1
Chapter 19 Relevant Costs for Decision Making
II. Exercises
Exercise 1 (Identifying Relevant Costs)
Case 1
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Item
Relevant
Sales revenue .................................. X
Direct materials ............................... X
Direct labor ..................................... X
Variable manufacturing overhead .......................................... X
Book value – Model E7000 machine ...........................................
Disposal value – Model E7000 machine ...........................................
Depreciation – Model E7000
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:
New Truck
Less: Proceeds from disposal, net
Replace
P10,200
Rebuild
1,000
P 9,200
Advantage of rebuilding
P8,500
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.
19-1
Chapter 19 Relevant Costs for Decision Making
II. Exercises
Exercise 1 (Identifying Relevant Costs)
Case 1
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Item
Relevant
Sales revenue .................................. X
Direct materials ............................... X
Direct labor ..................................... X
Variable manufacturing overhead .......................................... X
Book value – Model E7000 machine ...........................................
Disposal value – Model E7000 machine ...........................................
Depreciation – Model E7000