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Accounting: What the Numbers Mean, 5/e

David H. Marshall, Millikin University
Wayne W. McManus, International College of the Cayman Islands
Daniel F. Viele, Webster University

Cost Analysis for Decision Making

Multiple Choice Quiz

Please answer all questions


1	An opportunity cost is:
		A)	Income forgone because an opportunity to earn income was not pursued.
		B)	Never relevant in decision-making.
		C)	A cost that cannot be avoided.
		D)	A cost that has been incurred and that cannot be reversed by some future action.
		E)	Present in every decision-making situation.


2	Which of the following costs classifications would not be considered relevant in comparing decision alternatives?
		A)	Opportunity cost.
		B)	Differential cost.
		C)	Sunk cost.
		D)	Incremental cost
		E)	None of the above.


3	In considering whether to accept a special order at a price less that the normal selling price of the product but the additional sales will make use of present idle capacity, which of the following costs will not be relevant?
		A)	Fixed manufacturing overhead that can be avoided.
		B)	Direct materials.
		C)	Variable overhead.
		D)	Depreciation of the manufacturing plant.
		E)	Direct labor.


4	The cost of capital used in the capital budgeting process is primarily a function of:
		A)	ROE.
		B)	ROI.
		C)	The cost of borrowing the funds that will be invested.
		D)	The discount rate
		E)	None of the above.


5	Chuck's investment proposal would be inferior to Edna's proposal if it was expected to have a:
		A)	Longer payback period.
		B)	Higher accounting rate of return.
		C)	Higher internal rate of return.
		D)	Higher profitability index.
		E)	Larger net present value.


6	If the net present value of a proposed investment is positive:
		A)	The investment will not be made.
		B)	The cost of capital is higher that the internal rate of return.
		C)	The cost of capital is positive.
		D)	The cost of capital is lower that the internal rate of return.
		E)	The cost of capital is negative.


7	If an asset costs $32,000, has an expected useful life of 10 years, is expected to have a $4,000 salvage value and generates net annual cash inflows of $8,000 a year, the cash payback period is
		A)	10 years
		B)	8 years.
		C)	6 years
		D)	4 years
		E)	2 years


8	The type of costs included in a management analysis relating to a capital budgeting decision should be limited to:
		A)	Controllable costs
		B)	Standard costs
		C)	Relevant costs
		D)	Committed costs
		E)	Discretionary costs


9	A capital budgeting technique that considers the time value of money is the
		A)	Accounting rate of return.
		B)	Payback period.
		C)	Internal rate of return.
		D)	Return on investment.
		E)	None of the above.


10	If the discount rate used to evaluate a capital budgeting project is equal to the projects internal rate of return, the project's
		A)	Payback period is less than the useful life of the project.
		B)	Profitability index is negative.
		C)	Accounting rate of return is greater than the internal rate of return.
		D)	Present value of the cash outflows exceeds the present value of the cash inflows.
		E)	Net present value is zero.

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