CIMA BA2 · Chapter 11
Relevant costs and limiting factor decisions MCQs with Answers
12 multiple-choice questions on Relevant costs and limiting factor decisions for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
In short-term decision making, which costs are RELEVANT?
- A) All costs recorded in the accounting records
- B) Future cash flows that will change as a direct result of the decision
- C) Costs that have already been incurred
- D) Fixed overheads apportioned to the product
Show answer & explanation
Answer: B) Future cash flows that will change as a direct result of the decision
Relevant costs are future, incremental cash flows arising as a result of the decision. Sunk costs, committed costs, non-cash items such as depreciation, and apportioned fixed overheads that do not change are not relevant.
Question 2
A company spent $15,000 last month on a market research survey for a possible new product. It is now deciding whether to launch the product. How should the $15,000 be treated in the decision?
- A) Ignored, because it is a sunk cost
- B) Included in full as a relevant cost
- C) Included as an opportunity cost
- D) Spread over the expected life of the product
Show answer & explanation
Answer: A) Ignored, because it is a sunk cost
The survey cost has already been incurred and will not change whatever decision is made. It is therefore a sunk cost and is irrelevant to the launch decision.
Question 3
A contract requires 800 kg of material M. The company has 500 kg in inventory, bought for $6.00 per kg. The current replacement price is $7.20 per kg and the inventory could be sold as scrap for $2.50 per kg. Material M is used regularly in the company's normal production. What is the relevant cost of material M for the contract?
- A) $5,760
- B) $5,160
- C) $3,410
- D) $4,800
Show answer & explanation
Answer: A) $5,760
Because material M is used regularly, any inventory used on the contract will have to be replaced. The relevant cost of all 800 kg is therefore the replacement price: 800 x $7.20 = $5,760. The original purchase price is a sunk cost.
Question 4
A contract requires 800 kg of material N. The company has 500 kg of N in inventory, originally bought for $6.00 per kg, which it has no other use for and could sell for $2.50 per kg. The remaining 300 kg would have to be bought at the current price of $7.20 per kg. What is the relevant cost of material N for the contract?
- A) $5,760
- B) $3,410
- C) $5,160
- D) $3,000
Show answer & explanation
Answer: B) $3,410
The 500 kg in inventory has no alternative use, so the only benefit given up by using it is its resale value: 500 x $2.50 = $1,250. The extra 300 kg must be purchased: 300 x $7.20 = $2,160. Relevant cost = $1,250 + $2,160 = $3,410.
Question 5
A special order needs 200 hours of skilled labour, paid $15 per hour. Skilled workers are fully employed making Product Z, which earns a contribution of $12 per labour hour AFTER charging labour cost. If the order is accepted, Product Z production will be reduced. What is the relevant cost of the skilled labour for the order?
- A) $3,000
- B) $2,400
- C) $0
- D) $5,400
Show answer & explanation
Answer: D) $5,400
Labour must be diverted from Product Z. The relevant cost per hour is the wage still paid ($15) plus the contribution forgone ($12) = $27. Relevant cost = 200 x $27 = $5,400.
Question 6
What is an OPPORTUNITY cost?
- A) A cost that has already been incurred and cannot be recovered
- B) The benefit forgone by choosing one course of action instead of the next best alternative
- C) A cost that will be paid in the future under an existing contract
- D) The historical cost of an asset less depreciation
Show answer & explanation
Answer: B) The benefit forgone by choosing one course of action instead of the next best alternative
An opportunity cost is the value of the best alternative given up when a resource is used for a particular purpose. It is relevant to decisions even though it does not appear in the accounting records. A cost already incurred is a sunk cost, and a contractual future payment is a committed cost.
Question 7
Machine hours are in short supply. Details of three products are: Product A: contribution $30 per unit, 2 machine hours per unit Product B: contribution $42 per unit, 4 machine hours per unit Product C: contribution $25 per unit, 1.25 machine hours per unit In what order should the products be ranked for production to maximise contribution?
- A) C, A, B
- B) B, A, C
- C) A, B, C
- D) B, C, A
Show answer & explanation
Answer: A) C, A, B
Rank by contribution per unit of the limiting factor: A = $30 / 2 = $15.00; B = $42 / 4 = $10.50; C = $25 / 1.25 = $20.00 per machine hour. The ranking is C, A, B. Ranking by contribution per unit (B, A, C) is incorrect when a resource is scarce.
Question 8
Machine hours are in short supply, with only 10,000 machine hours available. Details of three products are: Product A: contribution $30 per unit, 2 machine hours per unit, maximum demand 2,000 units Product B: contribution $42 per unit, 4 machine hours per unit, maximum demand 1,500 units Product C: contribution $25 per unit, 1.25 machine hours per unit, maximum demand 4,000 units What is the maximum total contribution achievable?
- A) $170,500
- B) $123,000
- C) $223,000
- D) $160,000
Show answer & explanation
Answer: A) $170,500
Rank by contribution per machine hour: C $25 / 1.25 = $20.00; A $30 / 2 = $15.00; B $42 / 4 = $10.50. Make C first: 4,000 units x 1.25 hours = 5,000 hours, contribution $100,000. Then A: 2,000 units x 2 hours = 4,000 hours, contribution $60,000. The remaining 1,000 hours make 1,000 / 4 = 250 units of B, contribution $10,500. Maximum contribution = $100,000 + $60,000 + $10,500 = $170,500.
Question 9
A company needs 5,000 units of a component. Making it in-house costs $14 per unit in variable costs and would also require a supervisor costing $18,000, who would not otherwise be employed. An outside supplier offers the component at $17 per unit. Which option is cheaper, and by how much?
- A) Make, saving $15,000
- B) Buy, saving $3,000
- C) Buy, saving $18,000
- D) Both options cost the same
Show answer & explanation
Answer: B) Buy, saving $3,000
Relevant cost of making = (5,000 x $14) + $18,000 avoidable supervision = $70,000 + $18,000 = $88,000. Cost of buying = 5,000 x $17 = $85,000. Buying is cheaper by $3,000.
Question 10
A product line earns a contribution of $40,000 a year and is charged $55,000 of apportioned fixed overheads, of which $12,000 would be saved if the line were discontinued. The rest of the overheads would continue. What would be the effect on company profit of discontinuing the line?
- A) Profit would rise by $15,000
- B) Profit would fall by $40,000
- C) Profit would fall by $28,000
- D) Profit would rise by $27,000
Show answer & explanation
Answer: C) Profit would fall by $28,000
Discontinuing the line loses its contribution of $40,000 but saves only $12,000 of avoidable fixed costs. The remaining $43,000 of overheads continue regardless. Net effect = -$40,000 + $12,000 = -$28,000, so profit falls by $28,000. The reported $15,000 loss after apportioned overheads is misleading.
Question 11
Which of the following is a COMMITTED cost, and therefore not relevant to a new decision?
- A) Materials that must be bought specifically for the new order
- B) Overtime that will be paid only if the order is accepted
- C) Lease rentals payable under a non-cancellable lease already signed
- D) Contribution lost from work that would be displaced by the order
Show answer & explanation
Answer: C) Lease rentals payable under a non-cancellable lease already signed
A committed cost is a future cash outflow that will be incurred whatever decision is taken, because of an existing obligation. The lease rentals will be paid anyway, so they are not relevant. The specific materials, extra overtime and lost contribution all arise only because of the decision.
Question 12
A company with spare capacity is offered a one-off order for 600 units at $22 each. Variable cost is $19 per unit, and a special tool costing $1,000 would have to be bought for the order and would have no further use. Normal fixed overheads, absorbed at $5 per unit, will not change. What is the effect on profit of accepting the order?
- A) Profit falls by $2,200
- B) Profit increases by $1,800
- C) Profit increases by $800
- D) Profit falls by $1,200
Show answer & explanation
Answer: C) Profit increases by $800
Incremental contribution = 600 x ($22 - $19) = $1,800. Less the specific tool cost of $1,000 = $800 increase in profit. The absorbed fixed overhead of $5 per unit is not relevant because total fixed overheads do not change.