7. In relevant cost analysis, which of the following costs is usually NOT considered relevant for decision making?
A. Incremental costs
B. Opportunity costs
C. Avoidable costs
D. Sunk costs
Sunk costs are past costs that cannot be recovered or changed. Hence, they are irrelevant for decision making.
8. A factory is considering accepting a special order for 1,000 units at ₹150 per unit. Variable cost is ₹120 per unit, fixed cost is already absorbed. Which cost is relevant for decision making?
A. Variable cost per unit (₹120)
B. Fixed costs
C. Historical cost of machinery
D. Depreciation already charged
Only the variable cost of ₹120 per unit is relevant, since fixed costs are already incurred and unaffected by this decision.
9. Which of the following best defines opportunity cost in decision making?
A. The cost that has been incurred in the past
B. The benefit foregone by choosing one alternative over another
C. The direct cost of producing a product
D. The depreciation charged on fixed assets
Opportunity cost is the value of the next best alternative foregone when a decision is made.
10. A company has limited machine hours. Producing Product A requires 2 hours per unit with contribution of ₹100 per unit. Product B requires 1 hour per unit with contribution of ₹60 per unit. Which product should be prioritized based on relevant cost analysis?
A. Both products equally
B. Product A
C. Product B
D. Cannot be decided
Contribution per hour: Product A = 100 ÷ 2 = ₹50; Product B = 60 ÷ 1 = ₹60.
Since Product B gives higher contribution per limiting factor (machine hour), it should be prioritized.
11. A firm spent ₹5,00,000 last year on market research for a new project. Now it needs to decide whether to go ahead with the project. How should this cost be treated in relevant cost analysis?
A. It is a sunk cost and irrelevant for decision making
B. It must be added to project cost
C. It should be treated as opportunity cost
D. It is an incremental cost
Market research expense already incurred is a sunk cost, which is not relevant for future decision making.
12. A company can lease out unused warehouse space for ₹1,00,000 per year or use it for a new product line. If the warehouse is used for the product line, what is the relevant cost?
A. Historical cost of warehouse
B. Depreciation of warehouse
C. Fixed maintenance cost
D. Opportunity cost of lost rent (₹1,00,000)
The foregone rental income (₹1,00,000) is the opportunity cost and must be considered as a relevant cost for decision making.
B. Allocating costs only based on direct labor hours
C. Tracing overhead costs to activities and then to products
D. Recording financial transactions
ABC allocates overheads to activities and then assigns them to products based on cost drivers, providing a more accurate product costing.
14. In ABC, the factor that causes a cost to be incurred is called:
A. Cost driver
B. Cost pool
C. Cost center
D. Cost ledger
A cost driver is the factor that directly influences or causes the cost of an activity, e.g., number of setups or machine hours.
15. A company incurs ₹5,00,000 on machine setups annually. Total number of setups is 500. If a product requires 20 setups, what is the setup cost allocated under ABC?
A. ₹15,000
B. ₹10,000
C. ₹18,000
D. ₹20,000
Cost per setup = 5,00,000 ÷ 500 = ₹1,000. For 20 setups: 20 × 1,000 = ₹20,000.
16. Which of the following is an advantage of Activity-Based Costing?
A. It reduces the need for cost classification
B. It provides more accurate product costing by identifying true cost drivers
C. It eliminates the need for traditional costing systems
D. It ignores overhead costs
ABC identifies activities and cost drivers, leading to more accurate product costing compared to traditional methods.
17. A company uses traditional costing based on direct labor hours. Switching to ABC reveals that low-volume products are:
A. Often under-costed under traditional systems
B. Always more profitable
C. Not affected by cost allocation
D. Always cheaper to produce
Traditional costing spreads overheads broadly, often under-costing low-volume products. ABC captures higher resource usage per unit for such products.
18. In ABC, costs are first accumulated in:
A. General ledger
B. Profit centers
C. Cost pools
D. Cost budgets
Under ABC, overheads are grouped into cost pools based on activities, and then assigned to products using cost drivers.
19. In decision making, which of the following is a non-financial consideration?
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Payback period
D. Employee morale
Non-financial factors like employee morale, customer satisfaction, and brand reputation are crucial in decision making beyond pure financial metrics.
20. Which of the following would be considered an ethical issue in business decision making?
A. Estimating project cash flows
B. Manipulating financial reports to show higher profits
C. Choosing between two suppliers
D. Deciding depreciation method
Manipulating accounts is unethical as it misleads stakeholders and violates principles of transparency and fairness.
21. A company is evaluating two suppliers. Supplier A offers lower prices but poor labor practices. Supplier B charges higher but follows ethical labor standards. Which non-financial factor should guide the decision?
A. Corporate social responsibility and ethical sourcing
B. Discount rates
C. Payback period
D. Cost of capital
Ethical considerations like CSR and responsible sourcing should guide supplier selection even if financial cost is higher.
22. Which of the following best reflects an ethical decision in banking?
A. Approving loans without collateral to increase loan book
B. Hiding NPAs to protect quarterly results
C. Refusing a profitable loan proposal due to money laundering concerns
D. Charging hidden fees from customers
Ethical banking prioritizes compliance and integrity over profits. Rejecting suspicious transactions aligns with AML/KYC norms.
23. Which of these is an example of a non-financial risk in decision making?
A. Fluctuating interest rates
B. Loss of brand reputation due to unethical practices
C. Decline in net profit margin
D. Higher cost of raw materials
Reputation damage is a non-financial risk that can significantly impact long-term sustainability even if short-term profits remain intact.
24. In ethical decision making, the "triple bottom line" approach evaluates:
A. Profits, cash flows, dividends
B. Assets, liabilities, equity
C. Costs, revenues, risks
D. People, Planet, and Profit
The triple bottom line evaluates business performance on three parameters: social (people), environmental (planet), and financial (profit).
